Political Stabilization Cycles in High Inflation Economies
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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