FISCAL CONSERVATISM AS A RESPONSE TO THE DEBT CRISIS

Abstract

In this paper we develop a model in which social conflict and adjustment costs induce delayed inflation stabilization. We show that the longer this delay is the less demanding are the conditions that some groups will accept in order to stabilize. In the context of the Latin American debt crisis, our model gives a rationale for the time lag between the outset of the crisis and the implementation of reform programs as well as for the strongly conservative nature of those that are currently being implemented.