What causes the failure of inflation stabilization plans?

Abstract

The paper discusses the causes of failure of inflation stabilization plans. Following a description of stylized facts of inflation stabilization, a model of Balance of Payments crises is presented, highlighting some of the main factors leading to the collapse of stabilizations. Empirical results obtained when estimating a binary probit model over a panel of 34 stabilizations identify real exchange rate appreciation, lack of foreign reserves, and government budget deficits as the main causes of failure of inflation stabilization plans. This is consistent with the model presented in this paper, with the stylized facts of stabilizations, and with some of the models found in the literature.