Money and Prices in Models of Bounded Rationality in High Inflation Economies

• Authors: Juan Pablo Nicolini and Albert Marcet.
• BSE Working Paper: 1217 | September 15
• Keywords: Inflation and money growth , switching regimes , quasi-rationality
• JEL codes: D83, E17, E31
• Inflation and money growth
• switching regimes
• quasi-rationality

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.