97 1/2005 South-East Europe Review S. 97 – 116 Goran Petrevski Macedonia: a decade of stabilisation policy Introduction – a history of high inflation With respect to experience with inflation, Macedonia differs significantly from most transition economies in two ways. Firstly, unlike most ex-communist economies, Macedonia has a long tradition of high and rising rates of inflation. All CEE countries, with the notable exception of Po- land, had single-digit inflation rates during the pre-transition period, but this was not the case in Macedonia, which experienced rapid and continuous price increases dur- ing the 1980s. The main reasons for the inflation differential between Macedonia and other centrally planned economies can be found in the price-determination mecha- nism. In CEE countries, the prices of all goods were centrally fixed, which provided virtual price stability in these economies over a long period. In contrast, the former Yugoslavia was a semi-market economy with a significant portion of prices being fully liberalised. Table 1 – Inflation in selected CEE economies in the pre-transition era Source: IMF World Economic Outlook October 1993; State Statistical Office. Note: CPI, annual growth rates. Secondly, all transition economies experienced sharp price jumps in the initial stages of the transformation process, due to the previously hidden inflation and subse- quent price liberalisation, but inflation dynamics were quite different in Macedonia, which did not see large jumps from an initially low price level. Instead, its inflation has been permanently rising over more than a decade with an expansionary monetary policy having been the main driving force. The basic explanation for the inflation dy- namics observed in the former Yugoslavia is related to the ‘political endogeneity of money’, i.e. the politically-determined credit allocation caused by so-called social ownership, as well as the high degree of political dependence of the central bank (Sujan and Lah, 1997; Ribnikar, 1999). 1975-84 1981-84 1985 1986 1987 1988 1989 Bulgaria 0.8 2.2 2.8 2.7 2.7 2.5 6.4 Former CSSR 1.6 2.0 2.3 0.5 0.1 0.2 1.4 Hungary 6.2 6.7 7.0 5.3 8.6 15.5 17.0 Romania 2.9 4.5 -0.2 0.7 1.1 2.6 0.9 Former USSR 0.8 1.1 0.7 2.1 1.5 0.3 2.4 Poland 19.0 31.5 15.1 17.8 25.2 60.2 251.1 Macedonia 28.5 48.6 72.0 86.0 115.0 196.0 1 246.0