Credibility of the Russian Stabilisation Programme in 1995-98

This paper investigates the price stabilisation process under the policy commitment to an exchange rate based programme. I develop a formal model which allows to quantify the credibility role in the price stabilisation process and assess the extent to which the economic fundamentals can affect the reputation of policymakers. I decompose devaluation expectations into a probability that authorities are not precommitted with certainty to preannounced policy and a probability that worsened economic fundamentals force authorities to renege on the chosen fixed exchange rate policy. The model is then estimated using Russian data for the IMF stabilisation programme, preceding the rouble collapse in August 1998. I find that past fundamentals and reputation are significant determinants of the devaluation expectations of the forward-looking private sector; the disinflation in Russia was fast partly because it was credible.