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

IMF Working Paper No. 04/111

35 Pages Posted: 10 Aug 2004

See all articles by Oya Celasun

Oya Celasun

International Monetary Fund (IMF) - Research Department

Gaston Gelos

Bank for International Settlements; Centre for Economic Policy Research (CEPR)

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

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.

Keywords: Disinflation, Credibility, Inflation inertia, Inflation dynamics, Expectations formation, Stabilization, Phillips Curve

JEL Classification: E52, F41, E61, E65

Suggested Citation

Celasun, Oya and Gelos, R. Gaston and Prati, Alessandro, Obstacles to Disinflation: What is the Role of Fiscal Expectations? (June 2004). IMF Working Paper No. 04/111, Available at SSRN: https://ssrn.com/abstract=574841 or http://dx.doi.org/10.2139/ssrn.574841

Oya Celasun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

R. Gaston Gelos (Contact Author)

Bank for International Settlements ( email )

Centralbankplatz 2
Basel, 4002
Switzerland
0612808201 (Phone)

HOME PAGE: http://https://www.bis.org/author/gaston_gelos.htm

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased ( email )