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Moderate Inflation

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Author Info
Rudiger Dornbusch
Stanley Fischer

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Abstract

Inflation persists at moderate rates of 15-30 percent in all the countries that successfully reduced triple digit inflations in the 1980s. Several other countries, for example Colombia, have experienced moderate inflation for prolonged periods. In this paper we first set out theories of persistent inflation, which can be classified into those emphasizing seigniorage as a source of government finance and those that emphasize the costs of ending inflation. We then examine the sources and persistence of moderate inflation episodes. Most were triggered by commodity price shocks; they were brief; and very few ended in higher inflation. We then present case studies of eight countries, including three that now suffer from moderate inflation, and four that successfully moved down to single digit inflation rates. We examine the roles of seigniorage, indexation and disindexation, the exchange rate commitment, and monetary and fiscal policy. The evidence suggests that seigniorage plays at most a modest role in the persistence of moderate inflations, and that such inflations can be reduced only at a substantial short-term cost to growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3896.

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Date of creation: Mar 1993
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Handle: RePEc:nbr:nberwo:3896

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

References listed on IDEAS
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  1. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
  2. H. W. Arndt, 1974. "Survey of Recent Developments," Bulletin of Indonesian Economic Studies, Taylor and Francis Journals, vol. 10(2), pages 1-34, July. [Downloadable!] (restricted)
  3. Corbo, Vittorio & Solimano, Andres, 1991. "Chile's experience with stabilization, revisited," Policy Research Working Paper Series 579, The World Bank. [Downloadable!]
  4. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-2), pages 1-84. [Downloadable!]
  5. Driffill, John, 1988. "Macroeconomic policy games with incomplete information : A survey," European Economic Review, Elsevier, vol. 32(2-3), pages 533-541, March. [Downloadable!] (restricted)
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  6. Rudiger Dornbusch, 1989. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February. [Downloadable!] (restricted)
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