Central America: Inflation and Stabilization in the Crisis and Post-Crisis Eras

Abstract

In the late 1970s, numerous domestic and external factors began to destabilize the Central American economies. In some cases, a misperception of the seriousness of these problems and a desire to prolong the economic bonanza led to the implementation of countercyclical policies and the accumulation of macroeconomic imbalances. In reaction to the critical situation, countries resorted in a second phase to more orthodox measures that weakened the domestic production base. The article presents an analysis of the various stabilization efforts implemented in the region, from the unorthodox approach favoured in the early 1980s to the more conventional strategies implemented after 1985. The policy review is completed by a statistical analysis that explores the multi-dimensional aspects of inflation in the region, in particular the respective contribution of internal and external factors.

Keywords: Central America, inflation inertia, stabilization policies

JEL Classification: C23, E31, E52, E61, N16, O11