Money and Markets: Essays in Honor of Leland B. Yeager

11 No-name moneyMaria Minniti and Lidija Polutnik*The expectational aspect of inflationary momentum makes the credibility of ananti-inflationary policy of great importance to how severe the withdrawal pangs willbe . . . How, though, could a resolute policy be made convincing from the start?(Yeager 1997: 67–8)IntroductionOn October 8, 1991, Slovenia introduced its own currency, the Slovene tolar,thereby becoming the first among the new economies in transition to achievemonetary independence. 1 The introduction of the new currency was justified bythe goal of achieving political independence and of isolating the country fromYugoslav inflation. The success of the effort toward independence, however, restedon the achievement of macroeconomic stability, which, in turn, required monetarysoundness. Within this context, Slovenia’s currency conversion and achievementof monetary stability offer an interesting example for the study of inflation and ofsuccessful stabilization programs.Yeager (1981) identifies some general features of inflation whose analysis isfunda mental when investigating ways to reduce its incidence. Among thesefeatures, the importance of the inflationary momentum, that is the ability exhibitedby inflation to perpetuate and deepen itself, is especially emphasized. Specifically,the inflationary momentum is described as having three distinct, though strictlyrelated, elements: (1) the credibility component; (2) the catch up component; and(3) the expectations component. Expectations are at the core of the inflationarymomentum. When prices rise at a brisk rate for a while, people recognize what ishappening and make their own pricing decisions accordingly. In particular, peoplemodify their calculations in order to catch up with what they expect inflation willbe. Thus, any attempt to alter the inflationary momentum has to be credible inorder to have a chance of succeeding. Interventions lacking credibility increaseuncertainty and, as a result, strengthen the catch-up effect and the inflationaryspiral. Of course, the three aspects may overlap and cannot be always clearlydistinguished. This paper supports Yeager’s analysis and shows that the Slovenianmonetary reform was successful because it addressed all three aspects of theinflationary momentum and, in particular, that the newly appointed Slovenian