Essays in Honor of Lance Taylor
Edited by Amitava Krishna Dutt
Chapter 12: Inflation, stabilization and growth: multiple equilibria in a structuralist model
12. Inﬂation, stabilization and growth: multiple equilibria in a structuralist model Jaime Ros* A major feature of Latin America’s economic performance in the 1990s has been the resumption of economic growth, at an overall modest pace and with a variety of performances across countries. A growing literature addresses the role that macroeconomic stabilization has had in this growth recovery and by now a wide consensus exists that stabilization has been an important factor, if not the major factor in some cases, behind economic recovery.1 A gap in this literature, however, is that the reverse causation going from growth to macroeconomic stability has been largely absent from the analysis. This chapter presents a growth model in the tradition of Taylor’s structuralist macroeconomics in which inﬂation stabilization results in a shift from a bad equilibrium with slow growth and high inﬂation to a high level equilibrium with low inﬂation and faster growth. The basic point of the model is that stabilization can trigger a virtuous circle of investment recovery, capital inﬂows and real currency appreciation which in turn strengthens the stabilization process. The triggering factor may be a heterodox price and wage freeze, a ﬁscal adjustment, a revival of animal spirits and private capital inﬂows or the resumption of international lending to the public sector. Usually more than one factor had a role; for example, ﬁscal adjustment followed by a recovery of international lending as in Chile in the mid-1980s, heterodox stabilization accompanied by debt relief...
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