Book contents
- Frontmatter
- Contents
- List of Contributors
- Preface
- Introduction Stabilization After Five Years of Reform: Issues and Experiences
- PART I GENERAL STUDIES
- PART II COUNTRY STUDIES
- 5 Inflation and Stabilization in Poland, 1990–95
- 6 The Political Economy of the Hungarian Stabilization and Austerity Program
- 7 Preparation and Implementation of a Credible Stabilization Program in the Republic of Croatia
- 8 Exchange Rate and Prices in a Stabilization Program: The Case of Croatia
- 9 Stabilization in Slovenia: From High Inflation to Excessive Inflow of Foreign Capital
- 10 Macroeconomic Stabilization in the Baltic States
- 11 Economic Reform in Ukraine
- PART III AFTERWORD
- Index
8 - Exchange Rate and Prices in a Stabilization Program: The Case of Croatia
Published online by Cambridge University Press: 09 October 2009
- Frontmatter
- Contents
- List of Contributors
- Preface
- Introduction Stabilization After Five Years of Reform: Issues and Experiences
- PART I GENERAL STUDIES
- PART II COUNTRY STUDIES
- 5 Inflation and Stabilization in Poland, 1990–95
- 6 The Political Economy of the Hungarian Stabilization and Austerity Program
- 7 Preparation and Implementation of a Credible Stabilization Program in the Republic of Croatia
- 8 Exchange Rate and Prices in a Stabilization Program: The Case of Croatia
- 9 Stabilization in Slovenia: From High Inflation to Excessive Inflow of Foreign Capital
- 10 Macroeconomic Stabilization in the Baltic States
- 11 Economic Reform in Ukraine
- PART III AFTERWORD
- Index
Summary
INTRODUCTION
Croatia has achieved remarkable results in stopping high inflation and maintaining price stability. After the average monthly rate of inflation for January–October 1993 had reached almost 28%, November inflation was negligible and deflation occurred during 1994. Price stability was achieved without direct price controls, mainly by using the exchange rate: both nominal and real exchange rate appreciated immediately after announcement of the program. Real money supply has recorded significant rates of growth since November 1993, and real output showed signs of the recovery during 1994. The aim of this essay is to explain the link between the exchange rate and prices during this particular stabilization episode.
Standard explanations of exchange-rate and price dynamics assume integrated financial markets that ensure arbitrage conditions, as well as a stable money demand function (see e.g. Dornbusch 1976). Neither of these assumptions seems plausible for a country like Croatia. Money and capital markets are underdeveloped, regional risk contributes to imperfect capital mobility, and real money declined during high inflation (mostly as a result of currency substitution). In order to analyze the interplay between the exchange rates and prices we use an aggregate-demand–aggregate-supply model with the exchange rate as a cost–push factor.
In the first section we describe some basic facts about the Croatian economy, and explain the first obstacle to the direct transmission of exchange-rate fluctuations into aggregate prices: an increase in the relative price of nontradables.
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- Macroeconomic Stabilization in Transition Economies , pp. 212 - 233Publisher: Cambridge University PressPrint publication year: 1997
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