8  Sargent (1982) notes the role of exchange rate stabilization in ending the European hyperinflations of the 1920s. Analysts of more recent stabilization programs in developing countries have observed that even if exchange rate-based policies succeed in reducing inflation initially, fixing the exchange rate may lead to subsequent problems (Vegh, 1992; Dornbusch and Warner, 1994).
In general, these are countries with more intense domestic market competition, better technology and greater openness to foreign competitors.3 These new models also stress the importance of countries’ institutional framework which may make market access easier and push domestic firms to innovate.