Obstacles to Disinflation: What is the Role of Fiscal Expectations?
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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
Please address any questions about this title to publications@imf.org