Optimal anti-inflation programs in semi-industrialized economies: Orthodox versus heterodox policies

Abstract

The paper characterizes the optimal time-consistent anti-inflation program in a small, open, semi-industrialized economy when policy makers choose the rate of exchange rate crawl, the rate of change of fiscal spending and a wage and price control parameter to minimize deviations of output and inflation. The optimal program involves a rapidly decelerating rate of crawl, a sharp reduction in spending, and a short initial period of wage and price controls. The paper also assesses the importance of controls in helping to reduce the output loss associated with fighting inflation.