The Costs of disinflation and their success conditions

SUMMARY It is accepted that inflation is the main obstacle to economical development by creating uncertainty and prevents from making adequate investments to certain areas. Furhermore, inflation causes flow of funds to unproductive areas. As a result, inflation creates poverty in long run. For this reason disinflation policies are implemented. The main goal of this study is to detect costs of disinflation and finding out ways to make disinflation policy successful. Success of disinflation policy depends on giving up of two benefits. One of them is seignorage revenues and the other one is increasing employment. As a result of these costs disinflation policies are not imposed properly. Inflation is a monetary phenomenon therefore controling of money supply is a must. Due to this, giving up of seignorage revenues not only controls money supply but also controls inflation. Therefore control of seignorage revenues is the first condition for successful disinflation policy. The other issue we should be interested in is the trade off betweeen employment and inflation. In a disinflation period employment is sacrificed for decreasing inflation. This issue is explained within the frame work of Phillips Curve. Therefore disinflation has employment costs. Successfulness of disinflation policies requires decisiveness. Therefore policy maker should prefer reducing inflation to employment without deviating from his decisive policy. If this is imposed properly the credibility of the policy would increase. Creadibility is one of the most important requirement and determinant of successful disinflation policies. If disinflation policies in Turkey were evaluted nearly all policies would be unsuccessful. Inflation inertia since 70's is clear proof of this failure. In this study two econometric applications are used. One of them is about seignorage in Turkey, the other one is about production, employment trade-off. According to results, it is found that there is no strong relationship between seignorage and budget deficit. According to second application, it is found that there is a negative relationship between production and inflation which means that inflation decreases production. This is mainly explained by entrepreneur's reluctance to long run investments in inflation periods.In conclusion, in disinflation periods, governments not only deprived of seignorage revenue but also deprived of employment. But in the end inflation falls and an enviroment for economic development is established. VI