Stabilization and Relative Prices: Chile 1982-1991

Abstract

Chile, as other countries in the region, has reduced inflation rates to a two-digit level varying within the range of 10 to 30 per cent. These rates are considered persistent and there is the political will to make them converge to levels prevailing in developed countries. This paper explores one of the implicit policy dilemmas surrounding this issue. Along with stabilization efforts, relative factor prices tend to move away from the values expected by participants in factor markets. This generates lack of confidence regarding the sustainability of the stabilization program. By means of a simple model, the paper shows that the distribution of benefits arising from increases in productivity affects relative prices and has important effects on the level at which inflation rates converge. The instruments used to produce such changes have additional effects on the variance of inflation rates.