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Delays In Stabilization Or In Reforms? The Debt Crisis

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  • Carlos ALBERTO CINQUETTI
  • Ricardo GONÇALVES SILVA

Abstract

Empirical analyses attributing the 1980s’ debt crisis to inconsistent stabilization policies rest on an inappropriate long‐run approach. Revising this long‐run approach yields opposite results: terms of trade shocks and foreign indebtedness explain this crisis, regardless of domestic stabilization policies. This prompts us to consider a new hypothesis, of delays in trade‐policy reforms, with a model in which terms‐of‐trade variation (under shocks) is endogenous to export structure and efficiency of resource allocation. Evidence from the structural equations model shows that allocation distortions negatively affect changes in terms of trade, which then explain this crisis. A political economy extension demonstrates that income inequality and regional trade policy determine the distortions, which in turn leads to this crisis.

Suggested Citation

  • Carlos ALBERTO CINQUETTI & Ricardo GONÇALVES SILVA, 2008. "Delays In Stabilization Or In Reforms? The Debt Crisis," The Developing Economies, Institute of Developing Economies, vol. 46(3), pages 290-314, September.
  • Handle: RePEc:bla:deveco:v:46:y:2008:i:3:p:290-314
    DOI: 10.1111/j.1746-1049.2008.00067.x
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    Cited by:

    1. Carlos A. Cinquetti & Keith Maskus & Ricardo G. Silva, 2011. "A Comprehensive Empirical Analysis of Trade Policy for a Small Country with Monopolistic Competition," EcoMod2011 3399, EcoMod.
    2. Costa Junior, Celso Jose, 2012. "Institutional Barrier and the World Income Distribution," MPRA Paper 45633, University Library of Munich, Germany.
    3. Carlos A. Cinquetti & Keith E. Maskus, 2013. "A Comprehensive Empirical Analysis of Trade Policy with Monopolistic Competition in a Small Country," EcoMod2013 5398, EcoMod.

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