In 1975 Chile implemented an ortodox stabilization program. The fiscal deficit was sharply reduced and monetary policy was tight. However, indexation of wages and the exchange rate to past inflation implied that inflation only gradually declined. In fact,

This paper investigates the short run effect of a change in the relative price of imports to exports, in a context of specific capital and labor movement subject to adjustment costs. We present a graphical and mathematical (dynamic) analysis of the adjust