Disinflation in Transition Economies

Marek Dabrowski is Vice Chairman of the Center for Social and Economic Research, Warsaw.

• List of Figures List of Tables and Appendices About the Authors Foreword (Simon Johnson) Introduction (Marek Dabrowski) 1. Disinflation Strategies and Their Effectiveness in Transition Economies (Marek Dabrowski) 1.1. The Economic Rationale for Disinflation 1.1.1. The Damaging Effects of High and Very High Inflation 1.1.2. Moderate and Low Inflation: The Danger of Inflation Inertia 1.1.3. Results of the Empirical Research 1.2. The Varying Speeds of Inflation 1.2.1. The Size of the Initial Destabilization 1.2.2. The Timing of Disinflation Programs 1.2.3. The Speed of Disinflation (until 1997) 1.2.4. Inflation Developments, 1998–1999 1.2.5. Reversal of the Disinflation Trend 1.3. Looking for an Effective Disinflation Strategy 1.3.1. Stabilization Strategies in the First Stage of Transition 1.3.2. Controversies Surrounding Exchange-Rate Targeting in Moderate- and Low-Inflation Environments 1.3.3. Exchange Rate Arrangements That stimulate Inflation Inertia 1.4. The Role of Fiscal Policy in Supporting the Disinflation Process 1.4.1. Monetary Financing of Fiscal Deficits 1.4.2. Nonmonetary Financing of Fiscal Deficits 1.4.3. Debt-Trap Episodes and Financial Crises 1.4.4. The Role of Fiscal Policy and Central-Bank Independence 1.5. Conclusions References Notes 2. Monetary Expansion and Its Influence on Inflation Performance in Transition Economies (Rafal Antczak) 2.1. Stabilization and Inflation 2.2. Simple Monetary Accounting 2.3. Inflation and the Rate of Growth of Broad Money 2.4. Final Remarks References Notes 3. Money Demand and Monetization in Transition Economies (Marek Jarocinski) 3.1. “Unfreeezing” the Monetary Overhang 3.2. Monetization in the Transition Economies Compared 3.2.1. Broad-Money Monetization and Per Capita GDP 3.2.2. Inflation and Monetization 3.3.3. The Banking Sector and Broad-Money Monetization 3.3. Factors Determining Monetization in the Transition Economies 3.3.1. Real GDP and Inflation Dynamics 3.3.2. The Shadow Economy 3.3.3. The Banking Sector’s Circumstances 3.3.4. Currency-Board Arrangements 3.4. High-Monetization Transition Economies 3.5. Medium-Monetization Transition Economies 3.6. Low-Monetization Countries 3.6.1. General Characteristics 3.6.2. Additional Factors in Low-Monetization Countries 3.6.3. How Demonetized Economies Function? 3.6.4. Money-Demand Dynamics during Stabilization, Following Hyperinflation 3.7. Conclusions Data Sources References Notes 4. The Influence of Exchange-Rate Stability on Inflation (Malgorzata Antczak and Urban Gorski) 4.1. The Transmission Channels of a Currency Depreciation on Prices 4.2. Inflation and Currency-Depreciation Rates in a Simple Analytical Framework 4.2.1. Exchange-Rate Stability 4.2.2. The Partial-Adjustment Model 4.2.3. Hypothesis 4. 2.4. Data 4.2.5. Results of Estimates 4.2.6. Some Additional Comments 4.3. When is an Exchange-Rate Anchor Sustainable? References Notes 5. The Inflationary Consequences of the Devaluation Crieses in Russia and Ukraine: First Observations (Marek Dabrowski, Urban Gorski, and Marek Jarocinski) 5.1. The Crises: Similarities and Differences 5.2. The Crisis Spiral Develops 5.2.1. Dynamics of the Russian Crisis 5.2.2. Ukrainian-Follow-up 5.3. Explaining the Initial Inflation Surge 5.3.1. The Influence of the Exchange Rate-Rate Depreciation on Prices in Russia 5.3.2. Expectations and Speculative Demand during the Initial Price Spike 5.3.3. The Influence of the Exchange-Rate Depreciation on Prices in Ukraine 5.3.4. The Role of Administrative Price Controls 5.4. Channels of Money Supply and Money Velocity 5.4.1. Money Supply in Russia 5.4.2. Monetary Aggregates in Ukraine 5.5. Comparing the Inflationary Consequences of the Financial Crises 5.6. Final Remarks Appendix. Data Sources References Notes 6. Disinflation Policy, Capital Inflow, and the Current-Account Balance (Krzysztof Rybinski and Mateusz Szczurek) 6.1. The Determinants of Foreign Borrowing 6.2. Policymakers’ Responses to Capital Inflows: Theoretical ....