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Corralling Expectations: The Role of Institutions in (Hyper)Inflation

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  • Hartwell, Christopher A
  • Szybisz, Martin Andres

Abstract

Changes in prices and especially in aggregate price levels are subjected to complex dynamics and extreme endogeneity, as expectations, current conditions, policies, and the rules of the game combine to form inflationary outcomes. This paper explores how inflationary expectations are set – and limited – via an exploration of the role of institutions in corralling expectations. Using a continuous time formulation of the second derivative of the price level, we introduce expectations and institutional related variables to understand how expectations can become unstable. Testing the model on monthly institutional and macroeconomic data for several countries, we find that one institution in particular, property rights, keeps inflationary expectations in check and stops high inflation from becoming hyperinflation. In a situation where property rights have broken down, however, expectations are allowed to roam free and quickly become unstable.

Suggested Citation

  • Hartwell, Christopher A & Szybisz, Martin Andres, 2021. "Corralling Expectations: The Role of Institutions in (Hyper)Inflation," MPRA Paper 105612, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:105612
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    More about this item

    Keywords

    Institutions; property rights; expectations; inflation;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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