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Inflation and stabilization in transition economies: An analytical interpretation of the evidence

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  • Ratna Sahay
  • Carlos A. Vegh
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    Abstract

    A simple model is developed to understand inflationary pressures and stabilization in non-market economies. It is shown that in the typical planned economy, the endogeneity of the money supply and the over-determination of the system (given that both prices and wages are set by the planners) imply that a permanent increase in wages leads to an ever-increasing monetary overhang. The model also suggests that price liberalization should lead to a price level overshooting provided that wages remain a nominal anchor. In light of the model, the paper reviews the inflation and stabilization experiences of several transition economies in Eastern Europe and the former Soviet Union. The paper concludes that (i) transition economies have suffered from essentially the same inflationary pressures as did planned economies, and (ii) the exchange rate has been more effective than money as a nominal anchor in reducing inflation

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

    Volume (Year): 1 (1996)
    Issue (Month): 1 ()
    Pages: 75-108

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    Handle: RePEc:taf:jpolrf:v:1:y:1996:i:1:p:75-108

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    Related research

    Keywords: inflation; stabilization; transition economies;

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    Cited by:
    1. Barlow, David, 2010. "How did structural reform influence inflation in transition economies?," Economic Systems, Elsevier, vol. 34(2), pages 198-210, June.
    2. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
    3. S. Fisher & R. Sahay & C. A. Vegh, 1997. "Stabilization and Growth in Transition Economies: The Early Experience," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    4. Sulo Haderi & Harry Papapanagos & Peter Sanfey & Mirela Talka, 1996. "Inflation and Stabilization in Albania," Studies in Economics 9613, Department of Economics, University of Kent.
    5. Ratna Sahay & Stanley Fischer & Carlos A. Végh Gramont, 1998. "From Transition to Market - Evidence and Growth Prospects," IMF Working Papers 98/52, International Monetary Fund.

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