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

164 Maria Minniti and Lidija Polutnik19 At the end of September 1991, the total foreign exchange reserves of the countryamounted to $170.1 million and consisted exclusively of commercial banks’ operatingaccounts (Bank of Slovenia 1995: 42).20 The Slovenian government contracted advisory services from Jeffrey Sachs. Soon, however,substantial differences developed between the views of Sachs and Joze Mencinger,at the time deputy prime minister of the economy (Mencinger 1993a; Pleskovic andSachs 1993). Eventually, in a memorandum issued on October 8, 1991, Western expertsJeffrey Sachs and Boris Pleskovic changed their view in favor of unrestricted floating(Mencinger 1993b: 11).21 Frankfurt cross exchange rates determined other rates.22 This is consistent with Yeager’s concern that “Loosely speaking, the smaller the countryis in relation to the rest of the world, the more the price incentives of adjustment occur athome rather than abroad” (Yeager 1968: 50).23 By 1994, however, the sharp decline of domestic inflation, coupled with some remainingwage controls, produced a significant real wage increase that, in turn, caused a sharpappreciation of the tolar and imports to increase. As a result, the balance of paymentregistered a significant trade deficit. The Bank of Slovenia was forced to intervene to stopthe foreign currency inflows by stabilizing the tolar and its foreign exchange reservesincreased to $770.1 million (Bank of Slovenia 1994: 28). At that time, the central bankadopted a substantive sterilization policy by issuing bonds with warrants in order towithdraw liquidity from the market. This indicates that, at least until that point, thecentral bank maintained its commitment to monetary stability. This episode is analyzedin Koppl and Mramor (2003).24 Ribnikar (1998) argues that the adjustment of trade patterns executed with little to nomonetary distortion was necessary to guarantee that the Slovenian economy was soundand competitive enough to successfully survive its possible entry in the European Unionand the adoption of yet another super-national currency.25 Most non-performing loans had been made to Slovenian companies that had lost theirmarkets in other Yugoslav republics.26 The concept of initial fixed exchange rates as “launching vehicles” for new fiat currencyis discussed in Selgin (1994).ReferencesAssembly of the Republic of Slovenia (1991). Program for Structural Adjustment and EconomicPolicy in 1992. Ljubljana: Executive Council Report.Bank of Slovenia (1991–97). Annual Reports.Bank of Slovenia (1994). Monthly Bulletin, June–July.Bank of Slovenia (1995). Monthly Bulletin, January.Bole, Velimir (1996). Stabilization in Slovenia: From High Inflation to Excessive Inflow ofForeign Capital. In M. Blejer and M. Skreb (eds.) Macroeconomic Stabilization in TransitionEconomies. Cambridge: Cambridge University Press, pp. 234–55.Cagan, Phillip (1956). The Monetary Dynamics of Hyperinflation. In M. Friedman (ed.)Studies in the Quantity Theory of Money. Chicago, IL: University of Chicago Press, pp. 25–117.Fischer, Stanley (1982). Seigniorage and the Case for a National Money. Journal of PoliticalEconomy, 90(2): 295–313.Koppl, Roger and Dusan Mramor (2003). Big Players in Slovenia. Review of AustrianEconomics, 16(2/3): 253–69.Kraft, Evan (2003). Monetary Policy under Dollarisation: The Case of Croatia. ComparativeEconomic Studies, 45(3): 256–77.