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Moderate Inflation

  • Dornbusch, Rudiger
  • Fischer, Stanley

Inflation persists at moderate rates of 15-30 percent in all the countries that successfully reduced triple digit inflations in the 1980s. Several other countries, for example Colombia, have experienced moderate inflation for prolonged periods. In this paper we first set out theories of persistent inflation, which can be classified into those emphasizing seigniorage as a source of government finance and those that emphasize the costs of ending inflation. We then examine the sources and persistence of moderate inflation episodes. Most were triggered by commodity price shocks; they were brief; and very few ended in higher inflation. We then present case studies of eight countries, including three that now suffer from moderate inflation, and four that successfully moved down to single digit inflation rates. We examine 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 inflations, and that such inflations can be reduced only at a substantial short-term cost to growth.

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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. 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.
  2. Corbo, Vittorio & Solimano, Andres, 1991. "Chile's experience with stabilization, revisited," Policy Research Working Paper Series 579, The World Bank.
  3. 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.
  4. Rudiger Dornbusch, 1988. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc.
  5. Driffill, John, 1988. "Macroeconomic policy games with incomplete information : A survey," European Economic Review, Elsevier, vol. 32(2-3), pages 533-541, March.
  6. Robert J. Barro, 1982. "Inflationary Finance under Discrepion and Rules," NBER Working Papers 0889, National Bureau of Economic Research, Inc.
  7. 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,.
  8. 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.
  9. 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.
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