The 1987 Mexican disinflation program: an exchange-rate-based stabilization?

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The 1987 Mexican disinflation program: an exchange-rate-based stabilization?

Resumen: Se examina si la experiencia desinflacionaria de México durante el periodo 1987-1994 es compatible con los hechos estilizados de expansión económica y de evolución del sector externo asociados a las estabilizaciones inflacionarias basadas en el tipo de cambio (ERBS, por sus siglas en inglés). Una rápida revisión de los datos muestra que la experiencia mexicana es bastante congruente con dichos hechos estilizados. Sin embargo, este documento muestra que existen algunas diferencias importantes, así como peculiaridades del caso mexicano que merecen un estudio más detallado. Específicamente, aquéllas que tienen que ver con el papel del ancla nominal y la naturaleza del ciclo económico.

Palabras clave: estabilización, desinflación, ciclos económicos, ancla nominal.

Abstract: We examine whether Mexico's disinflation experience during 1987-94 fits the widely accepted set of stylized facts of exchange-rate-based stabilization (ERBS) on inflation, the boom-recession business cycle, and the external sector. A cursory look at Mexican data shows that the experience fits quite closely the stylized facts of ERBS. However, the paper shows that there were some important differences and peculiarities of the Mexican case that deserve further study, especially regarding the role of the nominal anchor and the nature of the business cycle.

Keywords: stabilization, disinflation, business cycle, nominal anchor.

Introduction

During the past decades, a large number of stabilization programs have been adopted in chronic-inflation countries in Latin America and elsewhere. Disinflation programs that have relied on a single nominal anchor to contain inflation are referred to as orthodox programs, and could either be exchange-rate-based stabilizations (ERBS) or money-based stabilizations (MBS). (1) The so-called heterodox stabilizations have also included the control of other nominal variables, such as prices and wages. Well-known ERBS have included the Southern Cone "tablitas" of the late 1970s, Argentina's Austral (1985) and Convertibility Plans (1991), Brazil's Cruzado (1985) and Real Plans (1994), Israel's stabilization (1985) and Mexico's Pacto (1987). Money-based stabilizations have been less prominent, but have included programs in Chile (1973), Bolivia (1985), Peru (1990) and the Dominican Republic (1990).

After the numerous stabilization episodes, the literature studying ERBS has identified the following three empirical regularities. (2) First, ERBS achieve a significant reduction in inflation rates. However, the rate of inflation converges over time only gradually to the rate of exchange rate depreciation, and thus the real exchange rate steadily appreciates. The inflation rate reaches a new (lower) plateau still in excess of foreign inflation and further reductions in the rate of inflation are difficult to achieve. (3) A second regularity is that once the exchange rate becomes the nominal anchor, economic activity starts an expansionary phase --usually following a recession before the program. The expansionary phase tends to be associated with a surge in consumption, especially of durable goods, and investment. Eventually, economic activity slows down and enters a new recessionary phase. The initial boom in the ERBS business cycle contrasts sharply with the one observed in programs of the MBS variety, which have been associated with an immediate and strong recession. (4) A third stylized fact of ERBS refers to developments in the external sector. Practically all programs seem to bring about a deteriora...

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