The Welfare Costs of Moderate Inflation: The Ethiopian Experience 1991/2-2001/02
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Date
2005-06
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A.A.U
Abstract
The study uses the concepts of the welfare cost from inflation, and armey curves popularized by Martin
Bailey and Richard armey'; respectively to show that fiscal policy instrument can serve a function
further than progressively reducing fiscal deficits. In the absence of the abundance of financial
institutions monetary policy measures, as tools of short-term economic stabilization, can be
impotent. The study shows that with fiscal policy measures primarily aimed at progressively
lowering budget deficits, the policy choices for short term macroeconomic stabilization have
seen LDCs rely, in flexibly, on monetary policy measures that have failed to pay any' dividends.
The study also shows that the potential for fiscal adjustment measures can be exhausted pretty
quickly and an economy could slump back in to a corner solution on the policy space 9wehre fiscal
policy measures are once only good for reducing fiscal deficits ). The study indicates that less developed
economies that constantly put their faith on [short-term policy] measures that require intricate
institutional development should realize that those set of measures are dominated by policy
measures that do not require well structured institutions. Nevertheless, it cautions d1e
enthusiasm witl1 which fiscal policy
options are reintroduced into the policy choice scene should
not veil the need for immediate institutional improvement.
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Keywords
Ethiopian Experience, Welfare Costs of Moderate