A reference framework to analyze a stabilization plan

Abstract

The objective of this note is to present a simple framework that allows analyzing a stabilization plan. The article begins with the analysis of the conditions of long-term consistency of the plan, based on the restrictions and definitions of three basic sectors of the economy: fiscal, monetary and external. Special interest is assigned to the relationships that should exist between the internal operating result of the non-financial public sector, the commercial and current accounts of the balance of payments and the Central Bank: including the international reserves policy. Once the conditions of long-term consistency have been outlined, the analysis addresses the transition of the economy towards it. A simplified model of the economy is proposed to achieve conclusions about some relevant variables. Particular emphasis is placed on the evolution of the money market and on the related variables during this transition process. Finally, monetary policy alternatives are proposed after the monetization stage based on the assumption that the conditions of long-term non-inflationary consistency are not met. A “hard” monetary policy is defined and evaluated under a framework of economic agents’ rationality.

JEL classification: E31 ; E52 ; E63