Disinflation Policy Research Articles

Central Banking in Transition Countries

In the 1990s, the issues of central banking and central bank independence have gained increasing attention, in part owing to the role of the future European central bank, but also owing to the emergence of transition countries and the role of central banks in these countries. The main focus of the paper is on the preconditions of disinflation and successful stability policy in transition countries, paying special attention to the institutional requirements and to the choice of nominal anchors.

European Aspects of the Disinflation Policy of the Czech National Bank

European Aspects of the Disinflation Policy of the Czech National Bank

Israeli Inflation From An International Perspective

Israel’s post-stabilization experience of moderate inflation and eventual disinflation is compared with experiences in other countries. Lessons that emerge from an examination of international experiences indicate the importance of establishing early on credibility in the nominal anchor and a commitment to persevere with disinflation policies, achieving and maintaining a tight fiscal position, measures to reduce nominal rigidities, and widespread structural reform. Israel falls short on several criteria which explains why taming inflation in the post-stabilization period has been difficult. The paper concludes with a consideration of institutional arrangements that could sustain the current low inflation levels.

Israeli Inflation from an International Perspective

Israel’s post-stabilization experience of moderate inflation and eventual disinflation is compared with experiences in other countries. Lessons that emerge from an examination of international experiences indicate the importance of establishing early on credibility in the nominal anchor and a commitment to persevere with disinflation policies, achieving and maintaining a tight fiscal position, measures to reduce nominal rigidities, and widespread structural reform. Israel falls short on several criteria which explains why taming inflation in the post-stabilization period has been difficult. The paper concludes with a consideration of institutional arrangements that could sustain the current low inflation levels.

Disinflation, supply shocks and monetary policy

This paper reviews the main features of the Czech macroeconomic development in the last years with the accent on disinflation and real GDP. The adjustment path of the Czech economy is clear: The decrease in nominal GDP growth has caused a deceleration of inflation on the one side and a drop of growth rates of real GDP and later even a decline in the level of real GDP on the other side. Further the econometric investigation of relations between wages and labour productivity and net inflation, producer prices and gap has been made. As the main factors influencing the disinflation in the last quarters the index of raw materials and foodstuffs has been revealed. The analysis of the impact of real exchange rate on net exports concludes the paper.

The Nominal Facts and the October 1979 Policy Change

Gavin and Kydland (1999) calculated the cyclical properties of money and prices for the periods before and after the October 1979 policy change. In this article, we extend that work by adding four more years of data and including a study of nominal interest rates and inflation. The adoption of a disinflation policy in October 1979 does not appear to have had a measurable impact on the cyclical properties of real variables. However, it made a dramatic difference in the cyclical properties of nominal variables. We also examine the covariance structure of several nominal relationships: the autocovariance of inflation, the lag from money growth to inflation, and lag from money growth to nominal GDP growth. Generally, the monetary policy in the early period allowed the average inflation rate to ratchet upward with each business cycle. This policy was associated with high variances, high autocorrelations, and high cross-correlations among nominal variables. The moderate inflation policy followed in the second period was associated with lower mean growth rates, less volatility, and lower cross-correlations between money growth and inflation.

Transitional and Steady‐state Costs of Disinflattion When Growth is Endogenou

In a monetary version of the Uzawa (1965)–Lucas (1988) model of endogenous growth, this paper illustrates how a credible policy of rapid disinflation can induce temporary declines in employment and output, with the former exhibiting a significant degree of persistance; however, these temporary declines in employment and output are not associated with any nominal rigidities in the economy, and therefore do not represent dead‐weight losses thhat occur along the transitio path, but are instead a part of an optimal response to the policy change. The measured welfare benefits of disinflation are seen to be higher when the transition path is taken into account.

Sacrifice Ratio in Europe: A Comparison of France, Germany, Italy and the U.K.

The aim of this paper is twofold. First, we try to assess to what extent the transmission mechanisms are different across Europe. We concentrate on Europe's four biggest economies: France, Germany, Italy and U.K. Second, we seek to evaluate whether the building of Europe (through the Single Market implementation and the run-up to EMU) has triggered a process of convergence among European countries. The econometric methodology takes its roots in the revisionist history of the Phillips curve of King and Watson (1994). The idea is that, although there is no long-run trade-off between inflation and unemployment (i.e., these two I(1) series are not cointegrated), there might exist a relationship in the short to medium run, due to adjustment lags and labor market rigidities. We build up a bivariate VAR for inflation and unemployment, in which a demand shock is defined as a shock which moves the two series in opposite directions. The VAR impulse response function then allows the persistence effect of shocks onto inflation and unemployment to be computed, from which we derive an assessment of the degree of symmetry in the transmission of monetary policy through the labor market in Europe. Quite restrictive assumptions are required for the sacrifice ratios to be of similar magnitude across countries. Furthermore, we cannot provide evidence of a structural convergence process in Europe. Finally, we show that the sacrifice ratios have been rising since the mid-eighties for the four countries we study, which means that the cost of disinflationary policies is higher today (when the inflation rate is already low) than it used to be. This suggests that the short-run inflation-unemployment trade-off is non-linear with respect to inflation.

Structural Estimates of the U.S. Sacrifice Ratio

This article investigates the statistical properties of the U.S. sacrifice ratio—the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural vector autoregression models and then conduct a series of simulation exercises to analyze their sampling distribution. We obtain point estimates of the sacrifice ratio that are consistent with results reported in earlier studies. However, the estimates are very imprecise, which we suggest reflects the poor quality of instruments used in estimation. We conclude that the estimates provide a very unreliable guide for assessing the output cost of disinflation policy.

Further Evidence on the Distributional Effects of Disinflationary Monetary Policy

The performance of the U.S. economy between 1994 and 1998 was so good that some pundits began to call for the Federal Reserve to increase interest rates to depress economic activity and reduce asset prices. Using a combination of methods the author argues that slowing the economy to stabilize asset prices would have adverse distributional effects. Impulse-response functions from the VAR indicate that unexpected increases in the federal funds rate increase unemployment among blacks and Hispanics by 50 to 90 percent more than among whites. Applying the narrative approach to two disinflationary periods, the author shows that higher interest rates in the 1974 disinflation decimated the housing industry, and that two interest rate sensitive sectors--construction and durable goods--showed the largest declines in 1980 and 1981 (periods following the 1979 tightening). Utilizing the Romer and Romer approach and examining the minutes of Federal Open Market Committee meetings to determine dates on which the Fed attempted to create a recession to reduce inflation, the author estimates that anti-inflationary policy shocks increase unemployment among non-whites more than twice as much as it does among whites. A social accounting matrix (SAM) is then used to examine the effects of disinflationary policy on various socioeconomic groups. In both of the two sectors that were hardest hit by recession following the 1974-1975 and 1979-1982 disinflations (construction and durable goods), blue-collar workers were harmed more than other workers in terms of lost income. In both industries urban households were hurt much more than rural households. The author concludes that minorities bear the brunt of disinflationary policy and will not share proportionately in the benefits of keeping the stock market stable, a factor that the Fed should take into account when contemplating actions aimed at stabilizing asset markets.

Structural Estimates of the U.S. Sacrifice Ratio

This paper investigates the statistical properties of the U.S. sacrifice ratio--the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural VAR models and then conduct Monte Carlo simulations to analyze their sampling distribution. While the point estimates of the sacrifice ratio confirm the results reported in earlier studies, we find that the estimates are very imprecise and that the degree of imprecision increases with the complexity of the model used. That is, increases in the number of structural shocks widen our confidence intervals. We conclude that the estimates provide a very unreliable guide for assessing the output cost of a disinflation policy.

Efficiency wages, disinflation and labor mobility

The paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of disinflation policies in an open economy facing imperfect capital markets. Wages are flexible in the nontradables sector, and based on efficiency factors in the tradables sector. With perfect labor mobility, a permanent reduction in the devaluation rate leads in the long run to a real appreciation, a lower ratio of output of tradables to nontradables, an increase in real wages measured in terms of tradables, and a fall in the product wage in the nontradables sector. Under imperfect labor mobility, unemployment temporarily rises.

Monetary Policy, Stock Returns, and the Role of Credit in the Transmission of Monetary Policy

We use a multi-factor asset pricing model to investigate whether fluctuations in industry stock returns are due to industry stock returns are due to industry-specific shocks or to monetary and other macroeconomic factors. We find that common factors explain a substantial portion of the variation in stock returns, indicating that economic fluctuations are not due to industry-specific factors alone. We also find that disinflationary policy benefits large but not small firms. These results have mixed implications for the view that credit market frictions propagate monetary shocks.

Disinflation and Interest-Bearing Money

In high inflation countries, policymakers often end up paying interest on part of the money supply. Higher interest rates on money have been used as a disinflationary policy. This paper analyzes the effectiveness of such a policy in the context of a closed-economy, staggered-prices model. Both a permanent and a temporary rise in the interest rate on money provoke an inflation at the expense of a recession. When the rise is temporary, however, the initial inflation slowdown is eventually followed by an upsurge of inflation over the level prevailing before the policy was implemented. Copyright 1996 by Royal Economic Society.

Transformation process and the J‐curve problem

Notes that most of the reforms in Eastern European countries have been piecemeal and have not constituted a comprehensive programme. Describes what a comprehensive programme consists of, why a J‐curve in output and employment arises and what consequences it has. Discusses the possibilities and limitations of external help to avoid a structural extension of this J‐curve problem. Notes that a comprehensive transformation programme includes institutional innovations as well as monetary disinflation policy, which produces recessionary J‐curve‐like output and employment costs. Also that effects of anticipatory recessions, based on anticipated future expenditures of western countries for rebuilding eastern economies (or for preventing economic decline and political disorder), may arise.

Monetary Policy, Stock Returns, and the Role of Credit in the Transmission of Monetary Policy

We use a multi-factor asset pricing model to investigate whether fluctuations in industry stock returns are due to industry stock returns are due to industry-specific shocks or to monetary and other macroeconomic factors. We find that common factors explain a substantial portion of the variation in stock returns, indicating that economic fluctuations are not due to industry-specific factors alone. We also find that disinflationary policy benefits large but not small firms. These results have mixed implications for the view that credit market frictions propagate monetary shocks.

Optimal disinflationary paths

This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

Optimal Disinflationary Paths

This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

Les déficits publics en Europe : causes, conséquences ou remèdes à la crise ?

Public deficits in Europe : causes, consequences, or remedies to the crisis ? Jerome Creel Henri Sterdyniak European countries have recently undergone the conjunction of high interest rates in relation to growth rates and substantial public deficits, which has made the burden of public debt go adrift. This paper aims at describing and explaining this evolution. In the first part, we construct and discuss some indicators of fiscal stance ; we show that, in the recent years, fiscal policy has hardly been expansionary ; the growth in debt can therefore be explained by the high level of real interest rates and the needs for economic stabilization. The discussion over the notion of sustainability of fiscal policies sheds light on its ambiguities and the risks we think are linked to its use. A more relevant distinction is between adjustment deficits, necessary to regulate the economy, and autonomous deficits, which are harmful for capital accumulation. The paper then presents the two opposed theories : according to the neoclassical view, public deficits themselves are responsible for the level of interest rates. Hence, their reduction should decrease interest rates with almost no cost in terms of activity level. These reductions would then boost capital accumulation and growth. According to the keynesian view, however, public deficits are necessary to support demand when interest rates grow because of disinflation policies and financial deregulation. In this context, a number of models can explain the coexistence of high public deficits and real interest rates : Central Banks' independence, non cooperative economic policies with flexible exchange rates, constraints over « domi- nated countries » within a system of fixed exchange rates, the modifica- tion in the functioning of the financial spheres of activity. At last, a model with wealth behaviors discuss the consequences of a growth in interest rates over households and firms. It then analyses the optimal economic policy : the growth in public debt appears necessary to support both demand and capital accumulation. We can globally discard the classical view according to which growth in public debts and deficits would be primarily responsible for high real interest rates and unemployment. This analysis is not sensible in the low- demand context Europe has undergone since 1981. The increase in public deficits has appeared necessary to sustain economic growth and capital accumulation, as States had lost control over interest rates. Recovering their control is therefore a crucial stake in order to decrease real interest rates, boost growth, and then reduce public debts. The criteria on public finance in the Maastricht Treaty are not up the problem.

Inflation and Disinflation: The Israeli Experiment.

During the early 198Os, Israel's inflation rate rose to almost 500% per year - one of the highest inflation rates in the developed world. In 1985, the Israeli government implemented a program that immediately reduced inflation to 15%-20%, where it remained for the rest of the decade. How did the economy deal with these major changes so rapidly and successfully? In these eighteen articles, Leonardo Leiderman discusses why the Israeli plan worked and considers how other countries might benefit from similar policies. Even though standard economic models predict that output will drop and unemployment will rise during disinflation, Israel saw a boom in private consumption and large increases in real wages that lasted for about three years. To understand how the effects of Israeli disinflation policies defied typical expectations, Leiderman investigates how monetary and fiscal policy determined Israel's runaway inflation and how the country brought its economy abruptly under control. He finds that rates of inflation and consumption depend on the public's expectations about future fiscal adjustments and that foreign trade shocks do not inevitably lead to a long term rise in the inflation rate. Although Israel's case was unusual, it was not unique. Argentina, Brazil, Chile, and Mexico also experienced increases in economic activity after implementing stabilization policies, and Leiderman suggests that Eastern European economies might follow a similar path. His illumination of international trade and domestic policies, past and present, will interest academic economists and policymakers alike.