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Obstacles to Disinflation

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  • Gaston Gelos
  • Alessandro Prati
  • Oya Celasun

Abstract

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/111.

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Length: 35
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/111

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Keywords: Disinflation; Emerging markets; Inflation targeting; Fiscal management; Public finance; Economic models; inflation; central bank; monetary fund; monetary policy; inflation dynamics; inflation rates; inflation rate; monetary economics; high inflation; money market; inflation process; price level; actual inflation; inflation forecasts; chronic inflation; average inflation; rational expectations; monetary authority; real exchange rates; price stability; monetary policies; aggregate demand; reduction in inflation; money market interest rate; real wages; real output; inflation equation; expectations of inflation; real value; price inflation; nominal interest rates; moderately high inflation; relative prices; inflation target; effective exchange rates; rate of inflation; money demand; lower inflation; independent central bank; annual inflation; foreign currency; inflation stabilization; money market interest rates; average inflation rate; nominal interest rate; inflationary consequences; average price level; monetary regime; moderate inflation;

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References

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  1. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
  2. Gaston Gelos & Alessandro Prati & Oya Celasun, 2003. "Would "Cold Turkey" Work in Turkey?," IMF Working Papers 03/49, International Monetary Fund.
  3. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  4. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips curve," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-30, Board of Governors of the Federal Reserve System (U.S.).
  5. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1399-1436, November.
  6. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 837-50, August.
  7. Allan Drazen & Elhanan Helpman, 1986. "Inflationary Consequences of Anticipated Macroeconomic Policies," NBER Working Papers 2006, National Bureau of Economic Research, Inc.
  8. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 195-222, October.
  9. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(3), pages 529-554, April.
  10. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
  11. Buiter, Willem H & Grafe, Clemens, 2001. "No Pain, No Gain? The Simple Analytics of Efficient Disinflation in Open Economies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3038, C.E.P.R. Discussion Papers.
  12. Esteban Jadresic, 2000. "Can Staggered Price Setting Explain Short-Run Inflation Dynamics?," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0872, Econometric Society.
  13. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
  14. Oya Celasun, 2003. "Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization," IMF Working Papers 03/151, International Monetary Fund.
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Citations

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Cited by:
  1. International Monetary Fund, 2012. "Inflation Responses to Commodity Price Shocks," IMF Working Papers 12/225, International Monetary Fund.
  2. International Monetary Fund, 2005. "Inflation Targeting Lite' in Small Open Economies," IMF Working Papers 05/172, International Monetary Fund.
  3. repec:ebl:ecbull:v:6:y:2006:i:11:p:1-8 is not listed on IDEAS
  4. Martin Cerisola & Gaston Gelos, 2005. "What Drives Inflation Expectations in Brazil? An Empirical Analysis," IMF Working Papers 05/109, International Monetary Fund.
  5. A. Hakan Kara, 2008. "Turkish Experience With Implicit Inflation Targeting," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 8(1), pages 1-16.
  6. Alessandro Rebucci & Marco Rossi, 2006. "Measuring Disinflation Credibility in Emerging Markets: A Bayesian Approach with an Application to Turkey's IMF-Supported Program," Economics Bulletin, AccessEcon, vol. 6(11), pages 1-8.
  7. Selva Demiralp & Hakan Kara & Pýnar Özlü, 2011. "Monetary policy communication under inflation targeting: Do words speak louder than actions?," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1128, Koc University-TUSIAD Economic Research Forum.
  8. Joerg Bibow, 2006. "Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement?," IMK Studies 01-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  9. Yusuf Soner Baskaya & Hakan Kara & Defne Mutluer, 2008. "Expectations, Communication and Monetary Policy in Turkey," Working Papers 0801, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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