Corralling Expectations: The Role of Institutions in (Hyper)Inflation

Christopher Hartwell and Martin Andres Szybisz

MPRA Paper from University Library of Munich, Germany

Abstract: Changes in prices and especially in aggregate price levels are subjected to complex dynamics and extreme endogeneity, as expectations, current conditions, policies, and the rules of the game combine to form inflationary outcomes. This paper explores how inflationary expectations are set – and limited – via an exploration of the role of institutions in corralling expectations. Using a continuous time formulation of the second derivative of the price level, we introduce expectations and institutional related variables to understand how expectations can become unstable. Testing the model on monthly institutional and macroeconomic data for several countries, we find that one institution in particular, property rights, keeps inflationary expectations in check and stops high inflation from becoming hyperinflation. In a situation where property rights have broken down, however, expectations are allowed to roam free and quickly become unstable.

Keywords: Institutions; property rights; expectations; inflation (search for similar items in EconPapers)
JEL-codes: E02 E31 E42 E52 (search for similar items in EconPapers)
Date: 2021-01-27
New Economics Papers: this item is included in nep-mac and nep-mon
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