Macroeconomic Stability and How to Avoid the Frequent Use of Stabilization Therapies

Summary

All successful economic reforms start with a major stabilization effort. The basic monetary and fiscal theory of high inflation and sharp stabilization seems to apply more generally (budget deficits and money creation must be brought under control) and, to the extent that differences exist between groups of countries, these stem from problems in the ability to control the budget or the amount of credit or wage policy. The general lesson to be learned is that often macroeconomic adjustment cannot be achieved without at least some simultaneous structural reform and that the policy reform package has to place even greater emphasis on setting up institutions and rules of behaviour for the micro units. In order to diminish the costs of the reforms, the optimal sequencing of the reform measures is desirable. Countries that have experienced protracted high inflation need to achieve not only fiscal reconstruction by thorough budget balancing but also a far reaching institutional reconstruction that involves a financial system capable of providing efficient intermediation and a regulatory and trade regime that helps allocate resources in ways that maximize productivity. The efficacy of the financial system is a key determinant of the success of any economic transformation process.