What Explains Persistent Inflation Differentials Across Transition Economies?
July 1, 2007
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Summary
Panel estimates based on 19 transition economies suggests that some central banks may aim at comparatively high inflation rates mainly to make up for, and to perhaps exploit, lagging internal and external liberalization in their economies. Out-of-sample forecasts, based on expected developments in the underlying structure of these economies, and assuming no changes in institutions, suggest that incentives may be diminishing, but not to the point where inflation levels below 5 percent could credibly be announced as targets. Greater economic liberalization would help reduce incentives for higher inflation, and enhancements to central bank independence could help shield these central banks from pressures.
Subject: Banking, Fiscal policy, Fiscal sustainability, Inflation, Inflation targeting, International trade, Monetary policy, Price controls, Prices, Terms of trade
Keywords: Baltics, Central and Eastern Europe, CIS-West inflation, Eastern Europe, Fiscal sustainability, Global, inflation, inflation choice, inflation differential, inflation gap, inflation impulse, inflation outcome, Inflation targeting, Output-inflation trade-off, panel data, Price controls, price liberalization, Terms of trade, transition economies, Western Europe, WP
Pages:
32
Volume:
2007
DOI:
Issue:
189
Series:
Working Paper No. 2007/189
Stock No:
WPIEA2007189
ISBN:
9781451867534
ISSN:
1018-5941
