The End of Moderate Inflation in Three Transition Economies?

Abstract

Although the rate of inflation has declined in the more advanced transition economies such as the Czech Republic, Poland, and Hungary, it continues at moderate rates that are sufficiently high by regional standards to pose economic problems for these countries. In this paper, we examine the reasons for the persistence of this moderate inflation including passive fiscal policies, inappropriate exchange rate policies, and weak mechanisms for the transmission of monetary policy. We also use econometric methods to determine the causes of inflation. The persistence of inflationary expectations and the nominal exchange rate are found to play a much more significant role in the persistence of inflation than do monetary policy and nominal wage growth. These findings suggest that the role of monetary policy in halting inflation is limited at best.