Seminario de Investigación del IIEP | Chronic inflation and the costs of not addressing an upsurge in time

Seminario de investigación del IIEP

Chronic inflation and the costs of not addressing an upsurge in time

Expositor | Joaquín Waldman | Macro IIEP (UBA-CONICET)

This article builds a novel database of large inflationary shocks in developing countries to assess their short- and long-term impacts on GDP using a synthetic control approach. It also examines the conditions under which these shocks evolve into chronic inflation, applying a probit framework. We investigate both the mechanisms that trigger such accelerations and the outcomes they produce. The analysis yields three central findings. First, large inflationary surges are predominantly stagflationary, being mostly driven by supply-side shocks, and exerting an immediate negative impact on GDP. Countries that immediately lean against inflation do not experience worse short-term growth outcomes compared to those that delay action, but the latter suffer significantly greater long-term costs. Second, the economic costs are considerably higher when inflation becomes chronic, rather than being resolved quickly. Third, the likelihood of evolving into chronic inflation depends crucially on policy responses, even when controlling for the size and source of the initial shock. Specifically, chronic processes are more likely when exchange rate depreciation and monetary expansion follow the shock, while improvements in fiscal balance reduce this risk. Taken together, these findings provide a strong argument against inaction, even in the face of seemingly transitory shocks.

Lugar FCE-UBA | Aula Olivera