An analysis of repressed inflation in three transitional economies

In centrally planned economies, domestic prices do not respond flexibly to market forces, so economic disequilibria - including repressed inflation - persist. The authors assess the extent of repressed inflation in Czechoslovakia, Poland, and Romania between 1980 and 1990. First, they develop a simultaneous equation model, which stipulates that the repressed inflation is caused by the difference in growth rate between households'money holdings and retail sales in the economy. Following are the model's basic assumptions: a stable demand for money function exists where the demand for real quasi-money depends on the level of real income and the expected rate of inflation; inflationary expectations are formed under an adaptive scheme in which expected inflation for the next period depends on the error made in predicting the current period's true inflation; the real stock of quasi-money balances adjusts to the desired level, after a time lag. The authors then derive a reduced-form equation on real quasi-money holdings, and estimate it with quarterly data for Czechoslovakia and Poland, and with annual data for Romania. Based on the estimated equation, they derive the true inflation rate for each economy. Finally, they determine the significance of the repressed inflation in each economy through statistical tests on parameters of the estimated equation. These are the authors'main findings: during 1980-90 in Czechoslovakia, repressed inflation was insignificant, the demand for money was mostly for transaction purposes, and inflationary expectations were almost myopic; in Poland, repressed inflation was significant but decreasing after 1987, and inflationary expectations adjusted fairly rapidly; and in Romania, repressed inflation was serious throughout the period, and inflationary expectations adjusted quite rapidly. This economic model needs to be refined and the data used need to be improved. But the paper's findings are broadly consistent with the results of most other studies.Economic Theory&Research,Markets and Market Access,Access to Markets,Environmental Economics&Policies,Banks&Banking Reform

Strategic Capital Taxation in Large Open Economies with Mobile Capital

The purpose of this paper is to provide a methodologyfor computing time-consistent, strategic capital taxes in a largeopen economy and to analyze the nature of these taxes. Our resultssuggest that even if a full set of nondistortionary taxes isunavailable and even if the government has redistributive goals,the country which imports capital should tax corporate capitaland the capital exporter should subsidize it. We perform comparativestatics experiments to show how strategically chosen taxes varywith the parameters of the model. JEL classifications: H21,E62 Copyright Kluwer Academic Publishers 1997capital taxation, capital mobility,

Measurement of Co-Circulation of Currencies

“Co-circulation” involves the regular use of two or more currencies within an economy. This paper examines methodologies to measure the extent to which foreign currencies are circulated within an economy. Ample anecdotal evidence exists that the U.S. dollar, DM, and other currencies are widely used outside their home countries, as general mediums of exchange, as speculative instruments, or as means of saving. Co-circulation is rarely estimated, which can result in serious errors in statistical estimates of international capital flows and monetary aggregates. We examine a variety of measurement techniques that might be used in various situations. However, estimation remains difficult or impossible in some settings. Limited evidence available suggests that co-circulation is widespread and large scale in some countries. In the final section, we discuss some policy implications of co-circulation regarding seigniorage, inflation control, and the partial integration of monetary systems that accompanies co-circulation. An appendix by Roman Zytek discusses possible sampling biases in measuring co-circulation due to segmentation in markets.