Monetary Policy in Post-Conflict Countries: Restoring Credibility

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Monetary Policy in Post-Conflict Countries: Restoring Credibility

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Title: Monetary Policy in Post-Conflict Countries: Restoring Credibility
Author: Starr, Martha A.
Abstract: Monetary chaos typically grows out of conflict situations. Governments commonly finance military operations by printing money, which along with falling output propels inflation into high- or hyper-inflationary ranges. Consequently, at the end of the conflict period, the value of the currency is usually highly degraded, there has been substantial substitution into foreign currencies, and the financial system is inoperative. This paper uses case studies and econometric analyses to examine post-conflict monetary experiences in several countries that underwent violent conflicts in the 1990s: Bosnia-Herzegovina, Croatia, Serbia-Montenegro, Kosovo, Moldova and the Transdniestria region, Georgia and the regions of Abkhazia and South Ossetia, Afghanistan, and Tajikistan. It is found that timely overhauls of monetary policy that re-establish the credibility of money lay a good foundation for post-conflict recovery: they both reduce inflation quickly and move money out of the realm of powers and authorities used to the benefit of some parties to a conflict, and into the realm where it serves the common good. However, credibility-oriented reforms do not necessarily have a beneficial effect on growth, at least in the short-run –- potentially posing a problem for making peace work.
Description: Working Paper No. 2004-07. 32 pages.
Date: 2004-09

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