INFLATION STABILIZATION AND NOMINAL ANCHORS

This paper analyzes the choice of a nominal anchor in disinflation pro grams in chronic inflation countries. Both theory and evidence suggest several conclusions. (i) The recessionary effects associated with dis inflation appear in the early stages of money-based programs but only in the late stages of exchange rate-based programs. (ii) Lack of credi bility is more disruptive under fixed exchange rates than under floati ng exchange rates. (iii) Attempting to pursue a disinflationary policy while maintaining a given level of the real exchange rate is likely t o be self-defeating. (iv) A high degree of currency substitution favor s the exchange rate as the nominal anchor.