Monetary Accommodation in Transition Economies: Econometric Evidence from Yugoslavia's High Inflation in the 1980's
Posted: 30 Mar 2001
A conjecture, advanced by some ad hoc evidence and the theory that money accommodates wage inflation in transition economies, is tested and accepted for Yugoslavia's high inflation of the 1980's. Within a cointegration framework, an overidentified long-run structure is estimated and accepted, where money is cointegrated with wages while not with prices. Furthermore, two independent common stochastic trends emerge, suggesting that aggregate supply shocks (i.e. those to wages and prices) and exchange rate shocks were driving Yugoslavia's high inflation, while the impact of money supply shocks was transitory. These results are due to the presence of soft budget constraint where money passively validated wage and price decisions, and to the Yugoslav debt and balance of payments crises in the 1980's which triggered exchange rate shocks. The results on the role of aggregate supply shocks might bear general relevance for transition economies.
Keywords: high inflation, monetary accommodation, transition economy, cointegration, stochastic trend
JEL Classification: E31, E51, P27
Suggested Citation: Suggested Citation