The Polish liberalization and stabilization program that was put into effect on January 1, 1990, called for the removal of virtually all price controls and for a sharp curtailment of production subsidies. These measures magnified the effects of pre-existing inflationary forces. Within one month, the retail price index rose by 79.6%. The inflation was, however, quickly brought under control by the stabilization measures adopted as a part of the reform package. By August, the rate of price increase declined to 1.8% per month. Yet the goal of complete price stability by year's end proved to be elusive. In 1991, prices still rose by over 70%; inflation slowed down in subsequent years but remained at a two-digit level (Table 1).

To throw light on the causes of the persistence of inflation, let us briefly examine Poland's post-1990 monetary and exchange-rate policy. The history of Polish stabilization may be divided into three distinct periods: the fixed–exchange-rate period (1 January 1990 – 17 May 1991), which was followed by the periodic adjustment period (which lasted until 27 August 1993) and the crawling peg period.

INFLATION IN THE FIXED–EXCHANGE-RATE PERIOD

The Solidarity-led regime that was formed in autumn of 1989 inherited a partially liberalized and half-dismantled command system, and an economy hovering on the verge of hyperinflation. During the last quarter of the year, the new government took measures to limit the rate of expansion of net domestic assets, and also to reduce the gap between the official exchange rate of the zloty and the free-market rate.