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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.

Suggested Citation

  • Albert Marcet & Juan Pablo Nicolini, 2005. "Money and Prices in Models of Bounded Rationality in High Inflation Economies," Working Papers 217, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:217
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    References listed on IDEAS

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    1. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February.
    2. Terry J. Fitzgerald, 1999. "Money growth and inflation: how long is the long run?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    3. James B. Bullard, 2002. "Stag-nations," National Economic Trends, Federal Reserve Bank of St. Louis, issue Jan.
    4. 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.
    5. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695, Decembrie.
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    Citations

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    Cited by:

    1. Pekarski, Sergey, 2011. "Budget deficits and inflation feedback," Structural Change and Economic Dynamics, Elsevier, vol. 22(1), pages 1-11, February.
    2. 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.
    3. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    4. André, Marine Charlotte & Dai, Meixing, 2017. "Is central bank conservatism desirable under learning?," Economic Modelling, Elsevier, vol. 60(C), pages 281-296.
    5. Aslanidis, Nektarios & Koursaros, Demetris & Otto, Glenn, 2024. "Asymmetry in inflation persistence under inflation targeting," The Quarterly Review of Economics and Finance, Elsevier, vol. 98(C).
    6. Dave, Chetan & Malik, Samreen, 2017. "A tale of fat tails," European Economic Review, Elsevier, vol. 100(C), pages 293-317.
    7. 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.
    8. 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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    More about this item

    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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