Cointegration and Tests of a Classical Model of Inflation in Argentina

Abstract We develop a classical model of inflation with rational expectations that carries a number of testable implications. First, money growth and inflation are cointegrated. Second, the changes in real money demand — the equilibrium error — anticipate future monetary policy. Third, cointegration between money growth and inflation implies, as Campbell and Shiller ( Journal of Political Economy , 1987, 95, 1062–1088, and Journal of Economic Dynamics and Control , 1988, 12, 505–522) show, cross-equation restrictions readily generated from an error-correction representation of the variables. Our results show that the allegedly different inflationary experiences of Argentina, Bolivia, Brazil, Mexico, and Peru are consistent with this classical model of inflation. In all countries, the data fail to reject these three conditions in all but one of the periods studied.

[1]  S. Fischer,et al.  Lessons of Economic Stabilization and Its Aftermath , 1992 .

[2]  Herschel I. Grossman,et al.  Explosive Rational Bubbles in Stock Prices , 1988 .

[3]  J. Sachs,et al.  Peru's path to recovery : a plan for economic stabilization and growth , 1991 .

[4]  Robert J. Shiller,et al.  Interpreting Cointegrated Models , 1988 .

[5]  S. Johansen.  STATISTICAL ANALYSIS OF COINTEGRATION VECTORS , 1988 .

[6]  George E. P. Box,et al.  Intervention Analysis with Applications to Economic and Environmental Problems , 1975 .

[7]  Mohsin S. Khan.  The monetary dynamics of hyperinflation: A note , 1975 .

[8]  James D. Hamilton,et al.  The observable implications of self-fulfilling expectations , 1985 .

[9]  P. Phillips.  Testing for a Unit Root in Time Series Regression , 1988 .

[10]  Herschel I. Grossman,et al.  Rational Inflationary Bubbles , 1986 .

[11]  Charles W. Calomiris,et al.  Asset Substitution, Money Demand, and the Inflation Process in Brazil , 1989 .

[12]  The Macroeconomics of Populism in Latin America , 1991 .

[13]  T. Sargent.  Rational Expectations and Inflation , 1986 .

[14]  Hildegart A. Ahumada,et al.  A dynamic model of the demand for currency: Argentina 1977–1988 , 1992 .

[15]  Eliana A. Cardoso.  A money demand equation for Brazil , 1983 .

[16]  J. Morales.  Inflation Stabilization in Bolivia , 1987 .

[17]  Robert J. Shiller,et al.  Cointegration and Tests of Present Value Models , 1987, Journal of Political Economy.

[18]  C. Granger,et al.  Co-integration and error correction: representation, estimation and testing , 1987 .

[19]  G. Box,et al.  Distribution of Residual Autocorrelations in Autoregressive-Integrated Moving Average Time Series Models , 1970 .

[20]  John B. Taylor.  Aggregate Dynamics and Staggered Contracts , 1980, Journal of Political Economy.

[21]  M. Pastor,et al.  Orthodox and Heterodox Stabilization Policies in Bolivia and Peru: 1985-1988 , 1989 .

[22]  Tom Engsted.  Cointegration and Cagan's Model of Hyperinflation under Rational Expectations , 1993 .

[23]  J. Rossi.  The demand for money in Brazil: What happened in the 1980s?☆ , 1989 .

[24]  J. Morales.  The Transition from Stabilization to Sustained Growth in Bolivia , 1989 .

[25]  W. Fuller,et al.  Distribution of the Estimators for Autoregressive Time Series with a Unit Root , 1979 .

[26]  Mark P. Taylor,et al.  Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence , 1993 .

[27]  C. Granger,et al.  Forecasting Economic Time Series. , 1988 .

[28]  A. F. Darrat.  The demand for money in Brazil: Some further results , 1985 .

[29]  Francisco Nadal De Simone,et al.  A money demand equation for Brazil: Comments and additional evidence , 1985 .

[30]  Anil K. Bera,et al.  Efficient tests for normality, homoscedasticity and serial independence of regression residuals , 1980 .

[31]  John J. Klein,et al.  Studies in the Quantity Theory of Money. , 1956 .

[32]  Darryl McLeod,et al.  Terms of trade fluctuations and economic growth in developing economies , 1991 .

[33]  N. Mocan.  Is there a unit root in U.S. real GNP?: A re-assessment , 1994 .

[34]  Ana Dolores Novaes.  Revisiting the inertial inflation hypothesis for Brazil , 1993 .