DISINFLATION AND THE RECESSION-NOW-VERSUS-RECESSION-LATER HYPOTHESIS - EVIDENCE FROM URUGUAY

Both analytical models and casual empiricism suggest that the timing o f the recessionary costs associated with inflation stabilization in ch ronic inflation countries may depend on the nominal anchor that is use d. Under money-based stabilization, the recession occurs at the beginn ing of the program, while under exchange-rate-based stabilization the recession occurs later in the program. This paper provides a first att empt to formally rest this hypothesis using a vector-autoregression mo del for Uruguay. The impulse response of output to different stabiliza tion policies is broadly consistent with the ''recession-now-versus-re cession-later'' hypothesis.