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Moderate Inflation

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  • Dornbusch, Rudiger
  • Fischer, Stanley

Abstract

Inflation persists at moderate rates (15-30 percent) in all the countries that successfully reduced triple-digit inflation in the 1980s. Several other countries--for example, Colombia--have experienced moderate inflation for prolonged periods. The authors introduce types of theories of persistent inflation. Theories emphasizing seigniorage as a source of government finance and those emphasizing the costs of ending inflation were detailed. They examine thesources and persistence of episodes of moderate inflation. Most episodes were triggered by commodity price shocks and were brief. Very few ended in higher inflation. This report presents case studies of eight countries, including three that now suffer from moderate inflation and four that successfully moved down to single-digit inflation rates. The authors analyze the roles of seigniorage, indexation and disindexation, the exchange rate commitment, and monetary and fiscal policy. The evidence suggests that seigniorage plays, at most, a modest role in the persistence of moderate inflation and that such inflation can be reduced only at a substantial short-term cost to growth.

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Bibliographic Info

Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 7 (1993)
Issue (Month): 1 (January)
Pages: 1-44

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Handle: RePEc:oup:wbecrv:v:7:y:1993:i:1:p:1-44

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  1. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
  2. Rudiger Dornbusch, 1988. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc.
  3. Corbo, Vittorio & Solimano, Andres, 1991. "Chile's experience with stabilization, revisited," Policy Research Working Paper Series 579, The World Bank.
  4. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
  5. Guillermo A. Calvo, 1983. "Staggered Contracts and Exchange Rate Policy," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 235-258 National Bureau of Economic Research, Inc.
  6. Driffill, John, 1988. "Macroeconomic policy games with incomplete information : A survey," European Economic Review, Elsevier, vol. 32(2-3), pages 533-541, March.
  7. Robert J. Barro, 1982. "Inflationary Finance under Discrepion and Rules," NBER Working Papers 0889, National Bureau of Economic Research, Inc.
  8. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  9. Corbo, Vittorio, 1985. "International Prices, Wages and Inflation in an Open Economy: A Chilean Model," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 564-73, November.
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