Obstacles to Disinflation: What is the Role of Fiscal Expectations?

Author/Editor:

Gaston Gelos ; Alessandro Prati ; Oya Celasun

Publication Date:

June 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Is backward-looking behavior in pricing or imperfect credibility of stabilization efforts responsible for the failure of inflation rates to decline to targeted levels during many disinflation programs? This paper assesses the relative importance of these two factors during a number of disinflation attempts in developing and transition economies. Using survey data, we find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process. We also find that an improvement in primary fiscal balances significantly reduces inflation expectations. This suggests that during stabilization episodes, priority should be given to building fiscal credibility by strengthening public finances.

Series:

Working Paper No. 2004/111

Subject:

Central bank autonomy Central banks Disinflation Fiscal policy Fiscal stance Foreign exchange Inflation Prices Real exchange rates

English

Publication Date:

June 1, 2004

ISBN/ISSN:

9781451853506/1018-5941

Stock No:

WPIEA1112004

Pages:

35

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