INFLATION AND STABILIZATION IN YUGOSLAVIA

Abstract

This paper examines the main causes of the acceleration of inflation in Yugoslavia during the 1980s and Yugoslavia's last attempt at stabilization in 1990. Yugoslav inflation shares common elements with inflation in other highly indebted countries despite appearances otherwise. Like these other countries, Yugoslavia failed to make internal adjustments to match a large transfer to resources abroad, resulting in a large internal redistribution to real resources through inflation. However, in Yugoslavia these internal conditions were not transparent. Instead of an open fiscal deficit, complex interactions took place among enterprises, banks, and the central bank, involving the central bank's absorption and servicing of a large stock of foreign exchange liabilities. Failure to correct hidden losses in the economy was the main reason that various stabilization attempts failed during the 1980s. The 1990 program was the first to recognize the existence of those hidden losses and the need for a fiscal correction. The program succeeded in eliminating the central bank's own deficit and was initially successful infighting inflation, but pressures to finance enterprises and avoid a liquidity crisis in the financial system resulted in a relaxation of monetary policy and a revival of inflation. Seen from this angle, the Yugoslav program of 1990 resembles other heterodox programs that had initial success in reducing inflation but later faltered because of an insufficient fiscal adjustment.