Berenstein, Edwards and Peter Montiel, “Savings, Investment and Growth in Eastern Europe”, IMF Working Paper (WP/91/61), June 1991.
Calvo, Guillermo “Are High Interest Rates Effective for Stopping High Inflation? Some Skeptical Notes”, The World Bank Economic Review, Vol. 4, No. 1.
International Monetary Fund, “The Role of Financial Markets and Intermediation in Transforming Centrally Planned Economies,” SM/92/45, March, 1992.
Sargent, Thomas and Neil Wallace, “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981.
The authors would like to thank participants in a seminar in the Policy Development and Review Department and Charles Adams, Gerard Belanger, Vicente Galbis, Manuel Guitian, Leslie Lipschitz, and David Robinson for comments and discussion. Any errors are of course, attributable to the authors.
For Poland, January 1990-December 1991, and for Bulgaria, Czechoslovakia, and Romania, January-December, 1991.
Similar conclusions are reached in a similar framework in Calvo and Coricelli (1991), although the emphasis there is on the possible existence of a credit crunch and its supply side effects.
While this is approximately true in the Central and Eastern European countries, it is not essential to this framework. The conclusions to be derived would also hold if net foreign assets were constant in foreign currency terms (that is the country operated a floating exchange rate) and purchasing power parity held at all times after the price liberalization. We have not explicitly included “other items net”, although implicitly a significant part of it--capitalization of interest--is captured.
It would perhaps be more realistic to make the share of debt service obligations met with internal resources (1-γ) a function of the real stock of debt or profits. Experiments with this approach indicated that it did not change the thrust of the conclusions but did tighten the perverse link between increases in interest rates and inflation.
These components derive from the expression for the change in the public debt ratio.
Here we assume flexible exchange rates which, of course, is formally accurate only for Bulgaria and Romania. However, each of the countries devalued by a large amount at the beginning of its reform program in anticipation of the pressure on its exchange rate and its inability, without large reserves, to resist it. Indeed Poland, after a little over a year, abandoned its peg.
If ɛ and π represent expectations for the full period and adjustment is complete by the end of the period than both λ and ψ would equal unity and equation (26) is correspondingly simplified.
For simplicity, we revert here to the version of the model without non-Interest bearing money.
In Poland the exchange rate was held constant throughout 1990.