Russia's recent experience fighting inflation--dramatic success in 1995-96 after repeated failures in 1992-94--poses a challenge for existing theories of the politics of macroeconomic stabilization. Monthly inflation rates fell to close to zero despite a deeply unpopular president distracted by heart disease, a government penetrated by economic lobbies, a far-from-independent central bank, a parliament dominated by opposition factions, a lively election season, and the fiscal pressures of fighting a regional war. The article reviews this experience, shows its incompatibility with existing political economy theories, and proposes an explanation with implications for other reforming regimes. Success was achieved by offering previous beneficiaries from inflation--major commercial banks and subsidized sectors--other sources of government-protected rents that did not increase the money supply. Even when expropriating powerful rent seekers is politically infeasible, it is sometimes possible to trade them less-inflationary rents for ones that are more inflationary.

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pp. 235-265
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