Working Paper: NBER ID: w12606
Authors: Thomas Sargent; Noah Williams; Tao Zha
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.
Keywords: Inflation; Hyperinflation; Fiscal Policy; Hidden Markov Model; Latin America
JEL Codes: D83; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government deficits (H62) | inflation rates (E31) |
| variations in deficits (H62) | expectations-driven hyperinflation (E31) |
| deficit management (H62) | permanent stabilization of inflation processes (E63) |
| superficial reforms (P39) | reduce inflation (E31) |
| high deficits (H62) | exacerbate inflation (E31) |