INTRODUCTION

After years of concerted effort, most Central and Eastern European (CEE) countries have succeeded in bringing high inflation under control. Yet, only Croatia has been able to bring its rate of inflation near Western European levels (see Table 1). Excepting Croatia and ex-Czechoslovakia, inflation in even the most successful CEE countries remains in the range of 18–30% per year, with little hope of much reduction in 1995. Even the relatively lower inflation in Czechia and Slovakia has stayed above the levels that their authorities had hoped to achieve.

The same pattern of controlled but stubborn inflation is also seen in Estonia, Latvia, and Lithuania. The annual rates of CPI (consumer price index) increase in these countries fell from 953–1,163% in 1992 to 26–45% in 1994, but are expected to remain above 20% in 1995.

What are the main factors behind this qualitatively similar inflationary performance of many postcommunist economies? Which factors best explain the remaining cross-country differences? The Baltic states are in several senses the best context in which to begin answering these questions, providing the closest we have to a controlled experiment for determining the impact of various factors on inflation. First, these three countries are undergoing the same transformation as all of CEE, meaning that similar qualitative factors will be at work. Second, they resemble each other in size, general location, and inheritance from the Soviet era (with respect to both economic structure and macroeconomic conditions).