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

Author/Editor: Celasun, Oya | Gelos, Gaston | Prati, Alessandro
Authorized for Distribution: June 1, 2004
Electronic Access: Free Full Text (PDF file size is 1,033KB)
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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.
 
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Series: Working Paper No. 04/111
Subject(s): Disinflation | Economic stabilization | Inflation targeting | Emerging markets | Fiscal management | Public finance | Economic models
Author's keyword(s): Disinflation | stabilization | inflation Dynamics | emerging markets | expectation formation
 
English  
    Published:   June 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1112004   Pages:   34
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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