High Inflation: Causes and Consequences, Economic Review, Fourth Quarter 1993 - Dallas Fed

We thank Mike Cox, Greg Huffman, Eric Leeper, John Welch, Mark Wynne, and, especially, Evan Koenig and Ellis Tallman for very helpful comments on earlier drafts of this article, as well as Steven Prue for excellent research assistance and Rhonda Harris and Monica Reeves for careful editorial review. Any remaining errors are our own responsibility. A four countries has been mixed, as Table 1 indicates. Argentina made several unsuccessful attempts at stabilization before initiating its April 1991 program, which still endures; Bolivia enjoyed an immediate and lasting end to inflation in mid-1985; and Mexico experienced a gradual and lasting end to inflation, while Brazil has yet to control inflation for any substantial length of time. Table 1 also provides figures on the changes in real economic activity taking place around each of the inflationary episodes. Each successful stabilization, regardless of whether it came about in a gradual or a shortlived fashion, has been accompanied by no worse than a temporary drop in output. Economists generally accept the view that inflation is ultimately a monetary phenomenon. Nevertheless, there are rather divergent opinions on the shortand long-run interactions between the monetary and the real sectors. So far, there has been no theoretical consensus on the macroeconomic trade-offs, if any, between inflation and output. Moreover, it is difficult to discriminate empirically between alternative views on inflation– output trade-offs. For a simple example, consider the “child’s game” in Figure 1, in which we plot inflation and High Inflation: Causes and Consequences