The Nonmonetary Determinants of Inflation: A Panel Data Study

IMF Working Papers, March 1, 1998

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The Nonmonetary Determinants of Inflation: A Panel Data Study

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Bibliographic details

• Authors: Carlo Cottarelli
• Published: March 1, 1998
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451844016.001

Summary / Research Question

• Explains inflation performance in a sample of industrial and transition economies by analyzing:
  • policymakers’ incentives to inflate the economy, and
  • the perceived costs of disinflation.

Key Findings

• Fiscal deficits have a significant effect on inflation, particularly (but not exclusively) in countries where the government securities market is not well developed.
• Other factors with a significant effect on inflation include:
  • relative price changes,
  • central bank independence,
  • the exchange rate regime, and
  • the degree of price liberalization.
• There is only limited evidence that other structural factors, such as those influencing the natural rate of unemployment, have a significant effect on inflation.

Determinants Examined (conceptual list)

• Policymakers’ incentives to inflate
• Perceived costs of disinflation
• Fiscal deficits
• Development of the government securities market
• Relative price changes
• Central bank independence (central bank autonomy)
• Exchange rate arrangements / exchange rate regime
• Degree of price liberalization
• Structural factors related to the natural rate of unemployment
• Inflation expectations

Policy Implications / Interpretations

• Strengthening government securities markets may mitigate the inflationary impact of fiscal deficits.
• Enhancing central bank independence can be associated with lower inflation outcomes.
• Exchange rate regime choices and the pace/degree of price liberalization materially influence inflation performance.
• Policies focused solely on structural factors affecting the natural rate of unemployment are less likely, based on this study, to have strong direct effects on inflation.

Content in this bundle

• The Nonmonetary Determinants of Inflation: A Panel Data Study - WP/98/23
  • The Nonmonetary Determinants of Inflation: A Panel Data Study - WP/98/23 (Markdown version)
  • The Nonmonetary Determinants of Inflation: A Panel Data Study - WP/98/23 (PDF)