Recurrent High Inflation and Stabilization: A Dynamic Game.

The authors analyze the dynamics of inflation that arise from fiscal deficits caused by the noncooperative behavior of interest groups. The 'state' variable is the degree of financial adaptation, a proxy for the share of wealth agents hold in alternatives to domestic currency. As financial adaptation becomes widespread, the costs of financing a given budget deficit rise. In this context, there can be fully rational cycles of increasing inflation and financial adaptation, followed by stabilization and remonetization. The model seems applicable to the experience of many Latin American countries. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.