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The conquest of South American inflation

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  • Thomas Sargent
  • Noah Williams
  • Tao Zha

Abstract

We infer determinants of Latin American hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden Markov model that potentially assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals. Our maximum likelihood estimates allow us to interpret observed inflation rates in terms of variations in the deficits, sequences of shocks that trigger temporary episodes of expectations driven hyperinflations, and occasional superficial reforms that cut inflation without reforming deficits. Our estimates also allow us to infer the deficit adjustments that seem to have permanently stabilized inflation processes. Our results show how the available inflation, deficit, and other macroeconomic data had left informed economists like Rudiger Dornbusch and Stanley Fischer undecided about the ultimate sources of inflation dynamics.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2006-20.

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Date of creation: 2006
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Handle: RePEc:fip:fedawp:2006-20

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  1. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2725-2748, December.
  2. Martin Ellison & Liam Graham & Jouko Vilmunen, 2005. "Strong contagion with weak spillovers," Computing in Economics and Finance 2005 30, Society for Computational Economics.
  3. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
  4. Sargent, Thomas J, 1981. "Interpreting Economic Time Series," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 213-48, April.
  5. In-Koo Cho & Kenneth Kasa, 2003. "Learning Dynamics and Endogenous Currency Crises," Computing in Economics and Finance 2003 132, Society for Computational Economics.
  6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  7. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers 1875, C.E.P.R. Discussion Papers.
  8. Guillermo Mondino & Federico Sturzenegger & Mariano Tommasi, 1992. "Recurrent High Inflation and Stabilization, A Dynamic Game," UCLA Economics Working Papers 678, UCLA Department of Economics.
  9. Robert J. Tetlow & Peter von zur Muehlen, 2002. "Avoiding Nash inflation: Bayesian and robust responses to model uncertainty," Finance and Economics Discussion Series 2002-9, Board of Governors of the Federal Reserve System (U.S.).
  10. Ramon Marimon & Shyam Sunder, 1993. "Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence," Economics Working Papers 25, Department of Economics and Business, Universitat Pompeu Fabra.
  11. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
  12. Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002. "Escaping Nash Inflation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 1-40, January.
  13. James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007. "Normalization in Econometrics," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 221-252.
  14. Kenneth Kasa, 2000. "Learning, large deviations, and recurrent currency crises," Working Paper Series 2000-10, Federal Reserve Bank of San Francisco.
  15. Thomas J. Sargent & Noah Williams, 2003. "Impacts of priors on convergence and escapes from Nash inflation," Working Paper 2003-14, Federal Reserve Bank of Atlanta.
  16. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
  17. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  18. Imrohoroglu, Selahattin, 1993. "Testing for sunspot equilibria in the German hyperinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 289-317.
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