Disinflations: Three essays

Chapter 1 studies the behavior of several macroeconomic variables during disinflationary episodes from low and moderate peaks in Latin-America and the Caribbean (LAC), for the period 1973--2001. The methodology used---which studies the average behavior of macroeconomic variables across episodes---overcomes the traditional problem of scarce long time series (of high frequency data) that has hindered the empirical research of monetary shocks in LAC. The main findings are: (i) GDP growth slowed during the disinflations of the 1970s and 80s but there is no evidence of similar contractionary effects for the 1990s; (ii) the trade balance significantly deteriorated; (iii) the nominal devaluation rate declined and (iv) the real exchange rate appreciated during the episodes.; Chapter 2 challenges the conventional view according to which disinflations in LAC---even from low and moderate peaks---have been carried out at no cost to output. After proposing a new methodology that allows for long-lived effects and inflation inertia when measuring costs of disinflations, large output costs are obtained for the 1970s and 80s.; Nevertheless, a puzzle arises: disinflation costs in the 1990s are negative. It is shown that an unusual combination of circumstances---i.e. capital inflows, structural reforms and the peculiar recent inflation history---can explain that fortunate result. Moreover, it is shown that LAC episodes exhibit faster disinflations than G7 episodes. That speed differential explains why disinflation costs in developed nations are on average larger than in LAC.; What explains that the achievements of some disinflations are sustained whereas in other cases those gains on the inflationary front dissipate quickly? The evidence presented in chapter 3, shows that disinflations in the 1990s were more sustainable than those in the earlier decades. Based on a sustainability index proposed in this chapter, various competing explanations on what determines the sustainability of disinflations are tested. Oil shocks, fiscal policy and inflation targeting are shown not to be significant determinants. Nevertheless, other important features, such as the exchange rate regime, the inflation rate at the end of the disinflations and food price shocks are shown to be important variables driving the improved sustainability records.