Disinflation in Transition Economies: The Role of Relative Price Adjustment
IMF Working Papers, December 1, 1996
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Bibliographic details
- Authors: Sharmini Coorey, Mauro Mecagni, Erik Offerdal
- Published: December 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451930061.001
Overview
- Research question: whether inflation in transition economies resulted from insufficiently tight financial policies and wage pressures or from the protracted adjustment of relative prices.
- Scope: analysis uses a new database covering 21 countries.
- Analytical framework: estimates the effect of relative price variability on inflation within a framework that controls for nominal and real shocks.
Data and Methodology
- Sample: 21 countries (new database assembled for the study).
- Estimation approach: effect of relative price variability on inflation estimated while controlling for nominal and real shocks.
- Key variables examined: money growth, wage growth, relative price variability, nominal shocks, real shocks.
Key Findings
- Money and wage growth were the most important determinants of inflation.
- Relative price variability had:
- a sizable effect at high inflation during initial liberalization, and
- a small effect at moderate inflation.
- Cost recovery may contribute to price variability, particularly in the advanced stages of the transition.
Implications and Interpretation
- The empirical results emphasize the dominant role of money and wage dynamics in driving inflation in transition economies within the sample.
- Relative price adjustment matters most during periods of high inflation associated with initial liberalization; its role is much smaller once inflation moderates.
- Cost recovery processes in later stages of transition can increase relative price variability and thus influence inflation dynamics.
Source: Disinflation in Transition Economies: The Role of Relative Price Adjustment, IMF Working Paper No. 1996/138.