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


  • Ratna Sahay
  • Carlos A. Vegh


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

Suggested Citation

  • Ratna Sahay & Carlos A. Vegh, 1996. "Inflation and stabilization in transition economies: An analytical interpretation of the evidence," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(1), pages 75-108.
  • Handle: RePEc:taf:jpolrf:v:1:y:1996:i:1:p:75-108 DOI: 10.1080/13841289608523358

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    Cited by:

    1. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos, 1998. "From transition to market: Evidence and growth prospects," MPRA Paper 20615, University Library of Munich, Germany.
    2. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
    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, 1999. "Inflation and Stabilisation in Albania," Post-Communist Economies, Taylor & Francis Journals, vol. 11(1), pages 127-141.
    5. Barlow, David, 2010. "How did structural reform influence inflation in transition economies?," Economic Systems, Elsevier, vol. 34(2), pages 198-210, June.
    6. Yuri V Sobolev, 2000. "Exchange-Rate-Based Stabilization; A Model of Financial Fragility," IMF Working Papers 00/122, International Monetary Fund.

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    inflation; stabilization; transition economies;


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