The conquest of South American inflation

Thomas Sargent, Noah Williams and Tao Zha

No 2006-20, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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.

Date: 2006
New Economics Papers: this item is included in nep-cba and nep-mon
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Related works:
Journal Article: The Conquest of South American Inflation (2009)
Working Paper: The Conquest of South American Inflation (2006)
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