Non-linear dynamics of inflation in high inflation economies

Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lead to multiple inflationary equilibria, Theoretical mo dels suggest that, in these circumstances, inflation follows a non-linear p rocess with up to three steady states and that the stability characteristic s of these depend on the process by which expectations are formed. In this paper we show that the exponential smooth transition autoregression (ESTAR) model is capable of exhibiting the required characteristics and so provide s a suitable vehicle for analysing inflation in high inflation economies. W e estimate ESTAR models for three well-known inflationary episodes-the Germ an hyperinflation of the early 1920s and post-Second World War inflations i n Argentina and Brazil. Our results imply that, during the periods in quest ion, each of these economies possessed a stable low-level equilibrium rate of inflation but that the variances of inflation shocks were large enough t o drive each economy into a high inflation state. For Brazil, this high inf lation state is stable around a particular value but in the cases of Argent ina and Germany the high inflation state is characterized by inflation cycl es.