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Identification and estimation of a model of hyperinflation with a continuum of "sunspot" equilibrium

  • Thomas J. Sargent
  • Neil Wallace

This paper constructs a model with two structural equations: the Government budget constraint and a linear version of Cagan’s portfolio balance equation. The model contains a continuum of equilibria with “sunspot equilibria.” Closed forms for the solutions are found. Even though there is a continuum of equilibria, the model is overidentified econometrically, so that the model restricts time series data on price levels and currency stocks. We describe how the free parameters of the model can be estimated, including some parameters that serve to index particular members of the continuum of equilibria. The sunspot equilibria hold out some promise of explaining anomalies in the observed behavior of inflation and real balances during hyperinflations.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 280.

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Date of creation: 1985
Date of revision:
Handle: RePEc:fip:fedmwp:280
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  1. Thomas J. Sargent, 1976. "The demand for money during hyperinflations under rational expectations: II," Working Papers 60, Federal Reserve Bank of Minneapolis.
  2. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  3. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  4. Sargent, Thomas, 1976. "Econometric exogeneity and alternative estimators of portfolio balance schedules for hyperinflations : A note," Journal of Monetary Economics, Elsevier, vol. 2(4), pages 511-521, November.
  5. Rusdu Saracoglu & Thomas J. Sargent, 1976. "Seasonality and portfolio balance under rational expectations," Working Papers 58, Federal Reserve Bank of Minneapolis.
  6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  7. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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