**Policy, Rerearch, and Extrrnal Affairs**

**Macroeconomic Adjustment and Growth**

# **WMS 4^23**

'[his pape-r -.- a product of the Niactrocconornciic AdIjusiic ill at Id ( Grk,v **th** I )i\ isio,n. ( ountr Fcotiortlics Department is, part ot a larger ci1or0t in PREt to ex.aminte o olic es. **p** iahi **i** / It A as tLunldC.'L1 h\ Lthe resCarch project "Stopping **Moigll** lInl0ation'" **PR.** P (074-24 **8. ('opics** e **l .rc** a **aiitlah** e **IIe ouli II** the World Bank 181 8 ti Street NW, Washington ID( 2($ ;3. Please contact Raqucl I .LI/ r mm)ni N 1 1-(057. etenisioni 3 4303 (35 pages with I **i** 2u1res and taiblcs .

the go'. ernimnnt s disillntltionarN policies and in **tile** ,USIAir ibilit. of the ilscal dtrtelnlllit, s omcthing no -iaoil i/liion pronraimn has doinc in .A\rciltina in the last 3.( \cars.

**Thelc** Austral planii in Atgenitiiaz; and t21c Ct ru/iado plan in Brazil were **thc first** stahililation programs in **recenti** years that succeedicl (alit te-mporarily) in drastically reducinig inflation **in** thc short run. Thiev ,,lso **hadi** a lasting clect in the sense of changing the pattern of inflation in both countries.

Pl:esuntiahl **\ thlis** "'ill recluITC implCmCIlting basic flisCatl retfour aimed at convincing the **plIl** ic **htlalt adj** usLuinll. is sustainable. **Re'liln (on** it_igh puHic sez toi prices and a fall in real wages durn i _th:' 1recIC_ is not CnoLuLil tecaIUSC thsce measu res alrc t illtimuitt to it]atioolarv shiocks.

B1efore these programs, intltation "as liighcr. more unstable, andn more clearly fiscal in Arcer^ntina **than** in Bra/il Thlese dilferetnces all but disappeared after **tde** Austrail **antid** Cruzadleo programs, as both couuntries undcrwAent similar inflatiol-stahili/atioll ctlcs.

It s at **io** uc,Css:ir\ to rcstore crcdihilittv **in** the : crnu. m ci- **ty'** cotm tiltlLn to stand, behlilld tlh- ronlliltl wiite.11or'. A 1;It,v tIlr cos t IThi is a diliterent kin, of crctlii!it isi uc. Telic goveniittetits It.thTh,rrrt> be x10iu t, to 11ttaiillt in tl e.l '. erc c,trio raitc or morrctar\ tLIrcl. c'. **it** I ;ne -\pecaLi .a7ilon It **s** Ilt inI **z** cr **.uel tt** 'L tot' r l1ill _!Cte il_ lllert itles.

Thiere is a **paLtic-n** to those c%clcs. tifilation Iflils dramalicallt ill re\srponsc to a 1<sup>io</sup> prooram ba.s,ed onI wIC t Pric controls ilr.d remains low torniornths. '[hnci inilLtion ecIe' ales **Is** Controls arc rento\'ed **_ita'i_** everttu.tldl btecometles c ;l" osic ten eacit"i ti hyperintlatlioar% levek. _A tti_ roun1d (l (l :on trols <Ices tlhe sta,e sta,e for the nL\A c\ _,ic._ hyperintlatlioar% levek. _A tti_ roun1d (l (l :on l ( enli t,i > iical ,centi historieN thcre is trols <Ices tlhe sta,e sta,e for the nL\A c\ _,ic._ t **0.t** . ., th L' nltrrllIAtitI' _!beL..eell_ pe'sirl'i \lt'e t' tlion Xar td ;11t1 i el ton L'11011 to Set Kiguel atd id i atan **addrcs'.** thi i uestion; **ol** itniri,l ihorN I iNii ont.: lror ittion A ill result \01v b nciteir coLntrlllr\ _Succeede_ t _sd_ staSNttail,1 . . ll a......ri. ta. :rII or ii oIL v itol l of tire hliigi hut _vtcd/_ rate ofl intlatioirt. r.'rlle: .c 1<sup>'t'til.t;t</sup> **o'!** in't.c tlleotctar L appI% **_f_** _te_ I **3⁄4'** itI Xi r';tc is used ;ill as anchio. TIn In thecir\ iew, thei t\pe of iun,tbilta t lit I,ro%.kith ertirrct. \ii! sabl:r Ir ilte short or eimerrgel alter (the fa6ilureL of the lhtelodo\ sltio:kN r'ikdilurIn rLu,I came about becausc **Itl** couLinries rclie(d liC;A\ I' **oln** inconre policies to stop ilnlatioll. **'lI** **_le le-_ .F\r een:i** ,trtd ia/il **s1lltd** sih **ilt** to%klard pealed use of these cotiltrols. **loetltlir .,** tih h miiis' otrhtdo\ Ni.tnh /aton prQ:ra.wis arid a'.oid pTice **anid Aorkers** pessuilimis aboul tuturc go'.crTMcnl t on r011 r,rte at ad' a Aa!c- pricc f're/ci in tle actionlls, Caused the1 **instabilit..** I Ir **pni'.** re **' !0o** r' !.tV't **Crledibirhil tollw** c **lt** 1 I of l! II 1. I Io I One of tlh li ilain problenis in tlfise couiitri cs is to estahlish a miliiuinu (dcorce of c-rdibilit'. it Th,5 ' iR1-. \A otip itig **i'.i** ;j5tr Sc rl 'S li -,,lT 1li';' .l' **I' W<'** li. I.1k I t ,7 o,v Ii, '' 'i .I I !' !, i ', i\.R ................. i:, **J17;. 1,t** r,,,i Affailrs (.0i'tl,8i i 'I,,,!C 0,' '.1ti'irt C' . < ! Tj. :!,,*' \ ', ' t: ;' .8t;ii1'" pohOwd I'li hr !iTiL!r ! 1v1z.;:, rlAti-ll,l ;r!. rivi,!i >. ;,7 +i h .> rx .s 1v' **i** K .s: 1