Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240659 
Year of Publication: 
2018
Series/Report no.: 
Working Papers No. 2018-18
Publisher: 
Banco de México, Ciudad de México
Abstract: 
This paper estimates a hidden Markov model where inflation is determined by government deficits financed through money creation and by expectations dynamics. The baseline model, proposed by Sargent et al. (2009) is able to distinguish between causes and remedies of hyperinflation, such as persistent or transitory shocks to fiscal deficits, and the de-anchoring of inflation expectations. The estimated sequence of monetized deficits provides an adequate account of inflation for the period 196994. The paper then extends the model to analyze the possibility that fiscal policy can affect inflation expectations in a context of Central Bank independence, as is the case of Mexico after 1994. Evidence is found that the exchange rate and sovereign interest rate spreads influence the evolution of inflation.
Subjects: 
Inflation
Inflation Expectations
Fiscal Deficit
JEL: 
E31
E42
E52
E63
Document Type: 
Working Paper
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