Abstract
We estimate a small open-economy macro model in which movements in inflation and output are driven by fiscal, real, monetary, exchange rate, and asset disturbances. We use 1980's data from Bolivia and Brazil, each of which undertook stabilization programs, though only Bolivia's succeeded. An important part of our analysis is ‘counterfactual’, where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated. For Bolivia, there is clear evidence that deficits affect inflation largely through their effects on money growth, and do not have much influence on output. External shocks are important for Brazilian inflation.
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