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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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12606.

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Date of creation: Oct 2006
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Publication status: published as Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, 04.
Handle: RePEc:nbr:nberwo:12606

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  1. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers, Centro de Estudios Monetarios Y Financieros- 9721, Centro de Estudios Monetarios Y Financieros-.
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  6. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, Elsevier, vol. 48(2), pages 337-368, August.
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  9. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(12), pages 2725-2748, December.
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  11. Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002. "Escaping Nash Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(1), pages 1-40, January.
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  13. Imrohoroglu, Selahattin, 1993. "Testing for sunspot equilibria in the German hyperinflation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 17(1-2), pages 289-317.
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  15. James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2004. "Normalization in econometrics," Working Paper, Federal Reserve Bank of Atlanta 2004-13, Federal Reserve Bank of Atlanta.
  16. In-Koo Cho & Kenneth Kasa, 2003. "Learning Dynamics and Endogenous Currency Crises," Computing in Economics and Finance 2003 132, Society for Computational Economics.
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