The political economy of failed stabilization

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 since the late 1950s, in order to determine which economic and political variables affect the probability of failure of stabilizations. Besides the well-known effects of real exchange rate appreciation, decreasing foreign reserves, budget deficits and slower GDP growth, I find that political instability, party fractionalization, undemocratic institutions, longer time in office and leftist incumbents increase the probability of failure of inflation stabilization plans.Fundação para a Ciência e a Tecnologia (FCT