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

  • Gaston Gelos
  • Alessandro Prati
  • Oya Celasun

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: 35
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/111
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  1. CELASUN Oya & GELOS Gaston & PRATI Alessandro, . "Would “Cold Turkey” Work in Turkey?," EcoMod2003 330700033, EcoMod.
  2. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
  3. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  4. 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.
  5. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  6. Oya Celasun, 2003. "Sticky Inflation and the Real Effects of Exchange Rate Based Stabilization," IMF Working Papers 03/151, International Monetary Fund.
  7. Esteban Jadresic, 2000. "Can Staggered Price Setting Explain Short-Run Inflation Dynamics?," Econometric Society World Congress 2000 Contributed Papers 0872, Econometric Society.
  8. Dornbusch, Rudiger, 1990. "Credibility and Stabilization," CEPR Discussion Papers 454, C.E.P.R. Discussion Papers.
  9. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
  10. 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.
  11. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
  12. Allan Drazen & Elhanan Helpman, 1986. "Inflationary Consequences of Anticipated Macroeconomic Policies," NBER Working Papers 2006, National Bureau of Economic Research, Inc.
  13. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
  14. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
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