Stabilization policies and trade liberalization:a comparative analysis of Chile, Argentina and Mexico’s experiences

ABSTRACT This article examines Chile’s 1976-81, Argentina’s 1987-92, and Mexico’s 1982- 92 stabilization experiences. In these three cases high inflation was curbed after orthodox stabilization policies with liberal structural reforms had been followed by using a fixed exchange rate as an “anchor” for the price level. It suggests the existence of a trade-off between internal and external equilibria. Orthodox stabilization policies can be very successful in equilibrating the balance-of-payment without producing price level stability. In contrast, curbing high inflation may require fixing the exchange rate, which, combined with trade liberalization, may produce huge commercial deficits.