Disinflations in Latin America and The Caribbean: A Free Lunch?

This paper challenges the conventional view according to which disinflations in Latin America -even from low and moderate peaks- have been carried out at no cost to output. After suggesting a new methodology that overcomes some of the shortcomings of the traditional methods used to measure the costs of disinflations, large sacrifice ratios are obtained for the 1970s and 80s. While the disinflation costs for the 90s remain negative, it is shown that an unusual combination of circumstances -i.e., factors related to capital inflows, structural reforms, and the peculiar recent inflation history- can explain this fortunate result.

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