Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331395 
Year of Publication: 
2025
Series/Report no.: 
Development Research Working Paper Series No. 6/2025
Publisher: 
Institute for Advanced Development Studies (INESAD), La Paz
Abstract (Translated): 
This study assesses the short-run macroeconomic effects of eliminating fuel subsidies in Bolivia, contrasting two implementation modes, an abrupt (shock) adjustment and a gradual removal. The empirical strategy combines two complementary approaches, an Autoregressive Distributed Lag (ARDL) model, grounded in the Quantity Theory of Money, which captures nonlinear links between subsidy reductions and inflation and enables counterfactual exercises; and a Structural Vector Autoregression (SVAR) with type-A contemporaneous identification that estimates the joint, dynamic response of inflation, the shadow exchange rate, and real output to subsidy withdrawal. From the ARDL, the counterfactual exercise suggests that early elimination would have significantly reduced macroeconomic distortions and structural inflation, consistent with the estimated convex relationship between the size of the adjustment and the inflation response. From the SVAR, results indicate that under an abrupt adjustment, year-over-year inflation peaks above 32%, alongside a sharp depreciation of the shadow exchange rate and a temporary output uptick attributable to front-running, which reverses in subsequent quarters. In contrast, gradualism slightly moderates the initial impact but prolongs inflation persistence and depreciation, increasing the reform's cumulative costs. The analysis does not explicitly model expectations; incorporating them could nuance the estimated dynamics. Overall, the findings show that postponing reform raises macroeconomic costs and that monetary-FX policy coordination is essential to curb pass-through and second-round effects. A swift adjustment, coupled with targeted compensatory measures and a transition toward a more flexible exchange-rate regime, can reduce the risk of self-reinforcing inflation and strengthen macroeconomic stability in the medium run.
Subjects: 
Subsidy removal
Shadow exchange rate
SVAR model
ARDL model
Quantity theory of money
JEL: 
C32
E31
E63
F41
Q48
Document Type: 
Working Paper

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