II Inflation Developments
Author:
Mr. Peter Doyle
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Mr. Carlo Cottarelli
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Language:
English
Print Publication Date:
23 Aug 1999
Keywords:
OP; inflation environment; inflation stabilization; further disinflation; disinflation threshold; country; inflation threshold; disinflation group; twelve-month inflation rates; stabilization phase; Inflation; Eastern Europe
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Abstract

By the end of 1992, major results in stabilizing inflation had been achieved only in the Central and Eastern European countries: inflation had dropped below 60 percent in the Czech Republic, Poland, and Slovak Republic (Table 1).2 Hungary had always remained well below this threshold.3 Inflation in the ruble zone was high and rising at this time. It surged dramatically in many countries that exited the ruble zone and established independent currencies and new central banks thereafter.

By the end of 1992, major results in stabilizing inflation had been achieved only in the Central and Eastern European countries: inflation had dropped below 60 percent in the Czech Republic, Poland, and Slovak Republic (Table 1).2 Hungary had always remained well below this threshold.3 Inflation in the ruble zone was high and rising at this time. It surged dramatically in many countries that exited the ruble zone and established independent currencies and new central banks thereafter.

Table 1.

Twelve-Month Inflation Rates in Transition Economies

(End of period)

article image
Source: IMF staff estimates.

A new wave of stabilization efforts followed during 1993–94 and enjoyed considerable success: during 1993–97, 19 other transition economies managed to break the 60 percent inflation threshold (Table 2)—in most cases without reversals—and by the end of 1997, 16 countries had brought inflation below 15 percent (Table 1). Georgia is a particularly dramatic case, reducing 12-month inflation from 50,000 percent during 1994 to single digits in 1997.

Table 2.

Disinflation Thresholds1

article image
Sources: National authorities; IMF, International Financial Statistics; and IMF staff calculations.

Periods between thresholds were defined using the annualized three-month inflation rates. When these first fell below a threshold, and remained there for a year, and if the 12-month inflation rate fell below that level during the following year without rising above it again in that year (except for countries in which inflation fell below the threshold during 1997), the country was deemed to have crossed the threshold.

From Fischer, Sahay, and Vegh (1996), except for Turkmenistan and Bulgaria.

While many countries delayed inflation stabilization for several years—with a relative cluster of stabilizations in late 1994–early 1995—inflation stabilization, once undertaken, was usually rapid. In many cases, less than six months elapsed between the initiation of a major stabilization effort and quarterly annualized inflation falling below 60 percent on a sustained basis (Table 2).4 Only five countries (Estonia, Kazakhstan, the Kyrgyz Republic, Lithuania, and Ukraine) took about 18–24 months from the beginning of the stabilization to get below 60 percent.5

But after the initial inflation stabilization phase, further disinflation was often slow. After breaking the 60 percent disinflation threshold, inflation persisted at moderately high levels (the 15–60 percent range) for more than two years in a number of countries. This slower disinflation group includes the same countries that reached 60 percent slowly (except Ukraine), though Latvia and Albania, which had quickly reduced inflation to 60 percent, joined the group there-after. However, the most often-quoted cases of persistently moderate inflation (see Cottarelli and Szapáry, 1998) are given by a number of advanced transition economies where inflation had dropped below the 60 percent threshold before the end of 1992. These include Poland (where it took more than four years to bring inflation down from 60 percent to below 15 percent), Hungary (where inflation was still over 18 percent at the end of 1997), and Slovenia (where inflation remained in the 15–30 percent range for over two years after the initial stabilization). Inflation in the Czech Republic and Slovakia has remained stuck to close to 10 percent for a number of years. The median inflation rate of those Central and Eastern European countries that began stabilization before 1993 fell from 27½ percent in 1993 to 15½ percent in 1997; the median inflation rate in the Baltics, Russia, and other countries of the former Soviet Union meeting the same criteria declined somewhat more rapidly, from 35½ percent to 12 percent over this period. Only Croatia and the former Yugoslav Republic of Macedonia have maintained inflation in low single digits for a number of years.6

Despite this persistent moderate inflation, the relapses into high inflation were relatively rare (Table 1). During 1993–97, there were three major reversals of inflation after initially successful stabilizations: Bulgaria and Romania in 1996, and Albania in 1997 (Table 1). And Albania and Bulgaria have since renewed their stabilization efforts. While outside the period covered by this paper, the resurgence of inflation in Russia during the summer of 1998 is also notable: the 12-month inflation rate jumped from less than 6 percent in July to 59 percent in October (following a monthly inflation rate of almost 40 percent in September), reflecting the depreciation of the ruble during August 1998. As discussed below, this resurgence of inflation shares many of the features characterizing the relapses into inflation observed during 1993–97.

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Cover Disinflation in Transition
Disinflation in Transition
1993-97
ISBN:
9781557757975
ISSN:
0251-6365
Publication Date:
23 Aug 1999
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557757975.084
Pages:
51

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