Obstacles to Disinflation: What is the Role of Fiscal Expectations?
IMF Working Paper No. 04/111
35 Pages Posted: 10 Aug 2004
There are 2 versions of this paper
Obstacles to Disinflation: What is the Role of Fiscal Expectations?
Obstacles to Disinflation: What is the Role of Fiscal Expectations?
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: Suggested Citation
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