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Political Stabilization Cycles in High Inflation Economies

  • Ernesto H. Stein
  • Jorge M. Streb

High inflation economies often exhibit stop-go cycles of inflation, rather than smooth inflationary processes. This paper relates these stop-go episodes of inflation to a political cycle: the government can try to repress inflation until after the elections in order to increase the chances of being reelected. This is modeled as a two-period game of incomplete information where voters try to pick the most competent government, and inflation (which signals lack of competency) can be lowered by the government in the short run through foreign debt accumulation. Several stabilization episodes, such as the Primavera Plan in Argentina and the Cruzado Plan in Brazil, are used to motivate the model.

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File URL: http://www.ucema.edu.ar/publicaciones/download/documentos/123.pdf
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Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 123.

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Date of creation: Oct 1997
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Handle: RePEc:cem:doctra:123
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  1. Eichengreen, Barry & Simmons, Beth, 1993. "International Economics and Domestic Politics: Notes on the 1920s," Center for International and Development Economics Research (CIDER) Working Papers 233212, University of California-Berkeley, Department of Economics.
  2. Jeffrey A. Frankel and Norbert Funke., 1994. "A Two-Country Analysis of International Targeting of Nominal GNP," Center for International and Development Economics Research (CIDER) Working Papers C94-035, University of California at Berkeley.
  3. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
  4. Jeffrey A. Frankel, 1992. "Is Japan creating a yen bloc in East Asia and the Pacific?," Pacific Basin Working Paper Series 92-09, Federal Reserve Bank of San Francisco.
  5. Jeffrey A. Frankel., 1994. "The Internationalization of Equity Markets: Introduction," Center for International and Development Economics Research (CIDER) Working Papers C94-033, University of California at Berkeley.
  6. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy; A Basic Framework," IMF Working Papers 90/110, International Monetary Fund.
  7. Frankel, Jeffrey A., 1994. "The Internalization of Equity Markets: Introduction," Center for International and Development Economics Research (CIDER) Working Papers 233216, University of California-Berkeley, Department of Economics.
  8. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  9. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
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