Moderate Inflation

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Abstract
Inflation persists at moderate rates of 15 to 30 percent in all the countries that successfully reduced triple digit inflations in the 1980s. Several other countries, for example Colombia, have experienced moderate inflation for prolonged periods. Theories of persistent inflation can be classified into those that emphasize seigniorage as a source of government finance and those that emphasize the costs of ending inflation. We examine the sources and persistence of moderate inflation episodes. Most episodes of moderate inflation were triggered by commodity price shocks and were brief; very few ended in higher inflation. This article presents case studies of eight countries, including three that now suffer from moderate inflation and four that successfully moved down to single-digit inflation rates. The roles of seigniorage, indexation and disindexation, the exchange rate commitment, and monetary and fiscal policy are examined. The evidence suggests that seigniorage plays no more than a modest role in the persistence of moderate inflations and that such inflations can be reduced only at a substantial short-term cost to growth.

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