Some implications of policy games for high inflation economies

The authors used the policy game approach to gain insight into a problem that has puzzled analysts of high inflation economies. Why are programs based on tight fiscal and monetary policies slow at reducing inflation in high inflation countries? Distinguishing between regimes of rule and discretion the authors explain that governments that cannot abide by policy rules and tend to use surprise inflation in a discretionary manner to achieve short term goals ( e.g. eroding the real wage or the real value of domestic debt ), raising the rational public's inflationary expectations. If policy makers can convince the public that they will not resort to surprise inflation tactics, the long term level of inflation may be reduced considerably. Another problem addressed is how should policymakers who are genuinely interested in disinflation react to adverse public expectations? The policymakers are faced with the dilemna of sticking to their announced policy and paying immediate costs in terms of unemployment and capital flight, or compromising their initial targets at the cost of renewed inflationary expectations. They conclude that lack of credibility generates disinflation costs. And if the source of a credibility problem is the inability of weak policymakers to honor their committment, strong policymakers may need to compromise to some extent.