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

40 Pages Posted: 8 Oct 2004  

Oya Celasun

International Monetary Fund (IMF) - Research Department

Gaston Gelos

International Monetary Fund (IMF) - Research Department

Alessandro Prati

International Monetary Fund (IMF) - Research Department

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Abstract

Persistently high expected inflation often makes it difficult for policy-makers to recover from inflationary episodes without substantial output losses. Using survey data from eleven disinflation episodes, we can assess whether the more or less sluggish decline of inflation rates towards lower target levels is related to backward-looking pricing behavior or to imperfect credibility of the stabilization efforts. We find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process. Second, we find that an improvement in various measures of fiscal balances significantly reduces inflation expectations. This evidence suggests that, when attempting to stabilize inflation, priority should be given to building fiscal credibility.

Suggested Citation

Celasun, Oya and Gelos, Gaston and Prati, Alessandro, Obstacles to Disinflation: What is the Role of Fiscal Expectations?. Economic Policy, Vol. 19, No. 40, pp. 441-481, October 2004. Available at SSRN: https://ssrn.com/abstract=600776

Oya Celasun (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

R. Gaston Gelos

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

700 19th Street NW
Washington, DC 20431
United States
202-623-9427 (Phone)
202-589-9427 (Fax)

Alessandro Prati

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

Macroeconomic Studies Division
700 19th Street NW
Washington, DC 20431
United States
202-623-6275 (Phone)
202-589-6275 (Fax)

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