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

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  • Albert Marcet
  • Juan Pablo Nicolini

Abstract

This paper studies the short run correlation of inflation and money growth. We study whether a model of learning can do better than a model of rational expectations, 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.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 172.

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Date of creation: Feb 2004
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Handle: RePEc:bge:wpaper:172

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

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References

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  1. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  2. Alvarez, Fernando & Atkeson, Andrew, 1997. "Money and exchange rates in the Grossman-Weiss-Rotemberg model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(3), pages 619-640, December.
  3. Arifovic, Jasmina & Bullard, James & Duffy, John, 1997. " The Transition from Stagnation to Growth: An Adaptive Learning Approach," Journal of Economic Growth, Springer, Springer, vol. 2(2), pages 185-209, July.
  4. Terry J. Fitzgerald, 1999. "Money growth and inflation: how long is the long run?," Economic Commentary, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Aug.
  5. David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
  6. 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.
  7. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers, Centro de Estudios Monetarios Y Financieros- 9721, Centro de Estudios Monetarios Y Financieros-.
  8. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper, Federal Reserve Bank of Atlanta 2006-20, Federal Reserve Bank of Atlanta.
  9. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(1), pages 40-58, February.
  10. 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.
  11. 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.
  12. George W. Evans & Seppo Honkapohja, 1993. "Adaptive forecasts, hysteresis, and endogenous fluctuations," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  13. 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.
  14. James Bullard, 2002. "Stag-nations," National Economic Trends, Federal Reserve Bank of St. Louis, issue Jan.
  15. Gilles Saint-Paul, 2002. "Some Evolutionary Foundations for Price Level Rigidity," CESifo Working Paper Series 720, CESifo Group Munich.
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Cited by:
  1. 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, Elsevier, vol. 28(7), pages 1182-1203, November.
  2. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers, Banco Central de Reserva del Perú 2007-005, Banco Central de Reserva del Perú.
  3. 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.

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