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Money and Prices in Models of Bounded Rationality in High Inflation Economies

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Author Info

  • Albert Marcet

    (Universitat Pompeu Fabra)

  • Juan Pablo Nicolini

    (Universidad Torcuato Di Tella)

Abstract

This paper studies the short run correlation of inflation and money growth. We study whether a model of learning does better or worse than a model of rational expectations, and we focus our study on countries of high inflation. We take the money process as an exogenous variable, estimated from the data through a switching regime process. We find that the rational expectations model and the model of learning both offer very good explanations for the joint behavior of money and prices. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.01.006
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 2 (April)
Pages: 452-479

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Handle: RePEc:red:issued:v:8:y:2005:i:2:p:452-479

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Related research

Keywords: Inflation and money growth; switching regimes; quasi-rationality.;

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References

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  1. Gilles Saint-Paul, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CESifo Working Paper Series 720, CESifo Group Munich.
  2. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
  3. Hildegart Ahumada & Alfredo Canavese & Pablo Sanguinetti & Walter Sosa Escudero, 1993. "Efectos distributivos del impuesto inflacionario: una estimación para el caso argentino," Economia Mexicana NUEVA EPOCA, , vol. 0(2), pages 329-383, July-Dece.
  4. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers 1875, C.E.P.R. Discussion Papers.
  5. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
  6. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  7. Terry J. Fitzgerald, 1999. "Money growth and inflation: how long is the long run?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug 1.
  8. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
  9. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 619-640, December.
  10. George W. Evans & Seppo Honkapohja, 1993. "Adaptive forecasts, hysteresis, and endogenous fluctuations," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  11. Arifovic, Jasmina & Bullard, James & Duffy, John, 1997. " The Transition from Stagnation to Growth: An Adaptive Learning Approach," Journal of Economic Growth, Springer, vol. 2(2), pages 185-209, July.
  12. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  13. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
  14. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
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Cited by:
  1. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú.
  2. Zorica Mladenovic & Bent Nielsen, 2009. "The role of income in money demand during hyper-inflation: the case of Yugoslavia," Economics Papers 2009-W02, Economics Group, Nuffield College, University of Oxford.
  3. Basco, Emiliano & D'Amato, Laura & Garegnani, Lorena, 2009. "Understanding the money-prices relationship under low and high inflation regimes: Argentina 1977-2006," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1182-1203, November.

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