Daily Management Review

IMF: Regulators of transition economies finally managed to slowdown inflation


The main reason for the slowdown in inflationary dynamics since the mid-2000s in transition economies was internal factors and a more systematic monetary policy of regulators, and not the influence of external conditions and the process of globalization, says the International Monetary Fund (IMF) in its new working paper.

After a period of slowing inflation in the 1990s and early 2000s, its rates in 19 transition countries (including Argentina, Brazil, China, India, Russia, South Africa and Turkey) remained relatively low and stable, the IMF report says. The weighted average value of the composite consumer price index in 1995–2004 in these countries fell by more than 100 percentage points (pp) and was recorded at about 5%, which is about 3 pp higher than the similar indicator in developed markets. Median overall inflation, despite the influence of individual episodes of hyperinflation in the 1990s, also shows a significant decrease: from about 20% to 5% since 2004.

At the same time, the index of core inflation (which does not take into account food prices and energy sources subject to greater volatility) also declined until the mid-2000s and remains stable. The growth rates of producer prices fell sharply in the 1990s and remained at a relatively low level, as did the GDP deflators, including prices for all finished goods and services produced domestically. Even after individual shocks — such as commodity price fluctuations, global financial crises and a rising dollar — inflation in most countries quickly stabilized, and central banks used short-term effects to lower interest rates and deal with recession, noted IMF researchers.

They believe that such effects cannot be explained by growing globalization and improved external conditions (for example, China’s active involvement in the international trade system or the quantitative easing policy of developed countries after the global financial crisis). Although their impact was statistically significant, it played a rather small role in inflationary dynamics. On the contrary, an active monetary policy of regulators and long-term inflation expectations within the transition countries themselves were crucial. For example, after the Asian crisis in the late 1990s, which vividly demonstrated the shortcomings of a solid exchange rate, the central banks of many countries switched to targeting inflation (the number increased from zero in 1995 to 15 in 2017), and governments began to apply fiscal rules (there were 14 of them instead of two by 2007; later, Argentina, India and the Russian Federation abandoned this policy, although the latter only for two years). Policies based on these rules contributed to price stabilization and predictability of regulators' actions, so that after 2004, volatility in emerging market countries turned out to be generally comparable to indicators of developed economies. The continued heterogeneity between the countries themselves leaves room for further improvement of monetary policy and lower inflation and long-term inflation expectations, the IMF concludes.

source: imf.org

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