Why do stabilizations fail?

Abstract

This paper is an empirical analysis of the likelihood of failure of inflation stabilization programs. Random effects logit models are estimated on a dataset of 39 programs implemented in 10 countries, in order to determine which economic and political variables affect the probability of failure of stabilizations. This study’s main contribution is to show that political factors are very important determinants of the success or failure of stabilization programs. There is empirical evidence that political instability, party fractionalization, autocracy, longer time in office and left-wing ideological orientation of incumbents lead to higher probabilities of failure of stabilization attempts.