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Obstacles to Disinflation: What is the Role of Fiscal Expectations?

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Author Info
Oya Celasun
Gaston R. Gelos
Alessandro Prati

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

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Length: 34 pages
Date of creation: 20 Jul 2004
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Handle: RePEc:imf:imfwpa:04/111

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Related research
Keywords: Disinflation ; Economic stabilization ; Inflation targeting ; Emerging markets ; Fiscal management ; Public finance ; Economic models ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Buiter, Willem H & Grafe, Clemens, 2001. "No Pain, No Gain? The Simple Analytics of Efficient Disinflation in Open Economies," CEPR Discussion Papers 3038, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Esteban Jadresic, 2000. "Can Staggered Price Setting Explain Short-Run Inflation Dynamics?," Econometric Society World Congress 2000 Contributed Papers 0872, Econometric Society. [Downloadable!]
  3. Sturm, Jan-Egbert & Haan, Jakob de, 2001. "Inflation in developing countries: does Central Bank independence matter?," CCSO Working Papers 200101, University of Groningen, CCSO Centre for Economic Research. [Downloadable!]
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  4. Oya Celasun, 2003. "Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization," IMF Working Papers 03/151, International Monetary Fund. [Downloadable!]
  5. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November. [Downloadable!] (restricted)
  6. Oya Celasun & Gaston R. Gelos & Alessandro Prati, 2003. "Would "Cold Turkey" Work in Turkey?," IMF Working Papers 03/49, International Monetary Fund. [Downloadable!]
  7. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  8. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips Curve," Finance and Economics Discussion Series 2001-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Dornbusch, Rudiger, 1991. "Credibility and Stabilization," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 837-50, August. [Downloadable!] (restricted)
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  10. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April. [Downloadable!] (restricted)
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  11. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February. [Downloadable!] (restricted)
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  12. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November. [Downloadable!] (restricted)
  13. Drazen, Allan & Helpman, Elhanan, 1990. "Inflationary Consequences of Anticipated Macroeconomic Policies," Review of Economic Studies, Blackwell Publishing, vol. 57(1), pages 147-64, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nicoletta Batini & Douglas Laxton, 2006. "Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets," Working Papers Central Bank of Chile 406, Central Bank of Chile. [Downloadable!]
  2. Alessandro Rebucci & Marco Rossi, 2004. "Measuring Disinflation Credibility in Emerging Markets: A Bayesian Approach with an Application to Turkey," IMF Working Papers 04/208, International Monetary Fund. [Downloadable!]
  3. James Y. Yao & Nathaniel John Porter, 2005. "'Inflation Targeting Lite' in Small Open Economies: The Case of Mauritius," IMF Working Papers 05/172, International Monetary Fund. [Downloadable!]
  4. Martin Cerisola & R. Gaston Gelos, 2005. "What Drives Inflation Expectations in Brazil? An Empirical Analysis," IMF Working Papers 05/109, International Monetary Fund. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
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