Obstacles to Disinflation: What is the Role of Fiscal Expectations?
IMF Working Papers, June 1, 2004
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Bibliographic details
- Authors: Gaston Gelos, Alessandro Prati, Oya Celasun
- Published: June 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853506.001
Overview
- Authors: Gaston Gelos, Alessandro Prati, Oya Celasun
- Date: June 1, 2004
- Research question: 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?
- Approach: Assessment of the relative importance of backward-looking pricing behavior versus imperfect credibility across a number of disinflation attempts in developing and transition economies; uses survey data to analyze expectation formation and its role in the inflation process.
Key findings
- Expectations of future inflation play a much more important role than past inflation in shaping the inflation process.
- An improvement in primary fiscal balances significantly reduces inflation expectations.
- Implication drawn from empirical results: fiscal credibility matters for successful disinflation.
Policy implications and recommendations
- During stabilization episodes, priority should be given to building fiscal credibility by strengthening public finances.
- Strengthening public finances is presented as a central policy lever to reduce inflation expectations and thereby support disinflation efforts.
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