Paper #875

Title:

Money and prices in models of bounded rationality in high inflation economies

Authors:

Albert Marcet and Juan Pablo Nicolini

Date:

January 2005

Abstract:

This paper studies the short run correlation of inflation and money growth. We study whether a model of learning can do better than a model of rational expectations, we focus our study on countries of high inflation. We take the money process as an exogenous variable, estimated from the data through a switching regime process. We find that the rational expectations model and the model of learning both offer very good explanations for the joint behavior of money and prices.

Keywords:

Inflation and money growth, switching regimes, quasi-rationality

JEL codes:

D83, E17, E31

Area of Research:

Macroeconomics and International Economics

Published in:

Review of Economic Dynamics 8 (2005) 452 - 479

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