Inflation Expectations in Postcommunist Russia

The central role of inflation expectations has long been recognized in macroeconomic theorizing and stabilization policy analysis. Wage bargaining, price setting, asset allocation and investment all depend on inflationary expectations in one way or another. However interest in the matter in the former socialist economies arose only during the liberalization attempts at the beginning of transition. Given economic agents lack of experience with open inflation in the majority of transition economies, few studies have been conducted on the formation of expectations in these economies. Hence the objective of this chapter is to analyze the formation and rationality of inflationary expectations in postcommunist Russia, a transition economy in which stabilization policies initially ignored inflation persistence. In the absence of a sample survey of inflationary expectations and an appropriate time series of financial market indicators we are forced to rely on inflation history. The findings of this chapter are in sharp contrast to the claim that lagged inflation is relatively unimportant in explaining inflation in transition economies (Cottarelli et al., 1998; Coorey et al., 1998; Cottarelli and Boyle, 1999).