Inflation aversion in transition countries: Empirical evidence from the Baltic States

In command economies, inflation is either absent or at least unrelated to supply and demand. However, when the economies in Eastern Europe started transforming into market economies, they suddenly experienced high and volatile inflation rates. Transformation countries are therefore interesting laboratories for studying individual inflation aversion. In this paper we study the level and determinants of individual inflation aversion in the three Baltic countries. Using data from 11 waves of the Eurobarometer survey, we find age, education and the macroeconomic situation to have significant effects on the likelihood to mention inflation among the most important problems facing the country. Moreover, we find the populations of all three Baltic countries to be significantly more inflation averse than the population of the United Kingdom, a western democracy with a long tradition as a market economy. We attribute this finding to the specific experiences of the Baltic populations with inflation.