The Conquest of South American Inflation

FRB of Atlanta Working Paper No. 2006-20

61 Pages Posted: 26 Nov 2006

See all articles by Thomas J. Sargent

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Noah Williams

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Tao A. Zha

Federal Reserve Bank of Atlanta; Emory University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

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. Our results show how the available inflation, deficit, and other macroeconomic data had left informed economists like Rudiger Dornbusch and Stanley Fischer undecided about the ultimate sources of inflation dynamics.

Keywords: self-conirming equilibria, rational expectations, adaptation, inflation, seigniorage, deficits, escape dynamics

JEL Classification: C5, E5, H3

Suggested Citation

Sargent, Thomas J. and Williams, Noah and Zha, Tao A., The Conquest of South American Inflation (November 2006). FRB of Atlanta Working Paper No. 2006-20, Available at SSRN: https://ssrn.com/abstract=947099 or http://dx.doi.org/10.2139/ssrn.947099

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

269 Mercer Street
New York, NY 10003
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National Bureau of Economic Research (NBER)

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Noah Williams

Princeton University - Department of Economics ( email )

Fisher Hall
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National Bureau of Economic Research (NBER)

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Tao A. Zha (Contact Author)

Federal Reserve Bank of Atlanta ( email )

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Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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