High real interest rates have been observed in many countries for several
months after the adoption of disinflation programs. While they may reflect
primarily a liquidity crunch, high ex post real interest rates can also be
explained in terms of an ex post error in inflation expectations that reflects a
lack of credibility of the low-inflation policy. The latter hypothesis is
tested using data for Argentina, Israel, and Mexico during the implementation
of the stabilization programs in the mid-1980s.
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Last update: July 19, 2001