Stabilization Themes

This chapter focuses on stabilization, which is the reduction of inflation to a very low level, and explains the tools to understand stabilization. These tools include stabilizing the exchange rate, getting to the roots of the inflationary problem, stopping the inertia, and others. A good way to judge different stabilization tools and to rank the efficiency of stabilization is by using the sacrifice ratio; an example of a famous stabilization during the Reagan administration is supplied. There are many ways to reduce the cost of stabilization, including by having institutions (like the central bank) help in the process of stabilization. The more autonomous the central bank is, the lower the inflation rate is. Professor Larraín talks about purchasing power parity and supply shocks and their causes, and gives historical examples.

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