MONEY DEMAND DURING HYPERINFLATION AND STABILIZATION: BOLIVIA, 1980–1988

Carlos M. Asilis · Patrick Honohan · Paul D. McNelis

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Abstract

This paper examines the demand for money in Bolivia during the 1980s, a decade of extreme instability with annual inflation rates reaching over 20,000 percent, and a subsequent stabilization, with annual rates falling to less than 25 percent and remaining so for more than five years. Our empirical analysis makes use of error‐correction approaches, time‐varying‐parameter estimation with Kalman filtering, and GARCH models of expected inflation and inflation variance. We find that expected inflation and inflation uncertainty both matter for money demand. Time‐varying estimates show that the reaction to monetary disequilibria was significantly faster during hyperinflation.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1981Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root 1990MAXIMUM LIKELIHOOD ESTIMATION AND INFERENCE ON COINTEGRATION — WITH APPLICATIONS TO THE DEMAND FOR MONEY 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1990Stationarity and Persistence in the GARCH(1,1) Model

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