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

By Gaston Gelos, Alessandro Prati, Oya Celasun

June 1, 2004

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Gaston Gelos, Alessandro Prati, and Oya Celasun. Obstacles to Disinflation: What is the Role of Fiscal Expectations?, (USA: International Monetary Fund, 2004) accessed September 23, 2024

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.

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

Keywords: Central bank autonomy, Disinflation, Disinflation attempt, Disinflation effort, Disinflation episode, Disinflation failure, Disinflation program, Emerging markets, Expectation formation, Fiscal stance, Inflation, Inflation dynamics, Inflation expectation, Inflation process, Price level, Real exchange rates, Stabilization, Structural inflation, Structural inflation equation, Western Hemisphere, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/111
Stock No:

WPIEA1112004
ISBN:

9781451853506
ISSN:

1018-5941

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