Inflation Stabilization and BOP Crises in Developing Countries

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High and persistent inflation has been one of the distinguishing macroeconomic characteristics of many developing countries since the end of World War II. Countries afflicted by chronic inflation, however, have not taken their fate lightly and have engaged in repeated stabilization attempts. More often than not, stabilization plans have failed. The end of stabilizations -- particularly those which rely on a pegged exchange rate -- has often involved dramatic balance of payment crises. As stabilization plans come and go, a large literature has developed trying to document the main empirical regularities and understand the key issues involved. This paper undertakes a critical review and evaluation of the literature related to inflation stabilization policies and balance of payment crises in developing countries.

Published: Handbook of Macroeconomics, Volume C, Taylor, John, and Michael Woodford,eds., North Holland: 1999, pp. 1531-1614.

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