Tuesday, January 28, 2014

Rich countries, poor countries, Japan and Argentina

The title reference is a joke I read on twitter (I'm now @infotranecon) via Matthew Yglesias; it prompted me to see if the information transfer model worked for Argentina. It works quite well across the years for which there is data (green = CPI data, blue = model result):

However, there are news reports lately that Argentina's inflation rate is not faithfully reported by the government (especially since 2008, or so they say) -- a 26.6% expected rate is only shown as a 10.9% official rate in the inflation numbers [1]. Conservative groups like the Cato institute say the rate is even higher. (Though their methodology is suspect -- how do you obtain a "black market" exchange rate? It would seem that there is a premium charged to wealthy individuals that wish to evade capital controls.) The 2008 date for distrusting the official statistics is also interesting; the populist Kirchner took office in December 2007. Is this all part of some sort of global elite consensus that dislikes policies for the poor? The information transfer model shows that while the monetary base is growing at an average of 25.6% per year since 2008, it could be consistent with the inflation rate of 8.7% in the official statistics through 2012 (in the graph above). What should we believe?

Truth be told, we should probably hold back on any conclusions. Macro data is fairly uninformative, especially over a short period in a single country. I decided to do a little more analysis anyway and dust off the information transfer hyperinflation model [2] and test a question: did the hyperinflation start before or after the election of Kirchner? In the plot below, I show two fits to the hyperinflation model (starting in 2008 = dotted red and started after 2004 = dotted blue) as well as the expected path from the model fit at the top of this post (blue dashed line):

I would say that the non-hyperinflation model is ruled out fairly decisively. It effectively predicts a Japanese style lost decade. The two hyperinflation scenarios warrant some discussion. The pre-Kirchner hyperinflation scenario (blue) fits with the early data and is more consistent with the 26.6% inflation above (it has an average of  20.4% inflation 2012-2014). The post-Kirchner hyperinflation scenario (red) is actually more consistent with the official statistics (a 12.0% inflation rate vs 10.6%). So that leaves a dilemma for the proscriptive economists: trust the official data and blame Kirchner or keep the estimates and place the blame elsewhere?

I'd like to reiterate that the macro data isn't that informative so it's really hard to draw any conclusions. However, I think it is an interesting way to think about what is going on. As for Japan (per the title), the model already did a good job:

[1] I used numbers from the IMF and FRED (Argentina's monetary base).

[2] The hyperinflation model essentially posits that the monetary base is exogenous  -- changes to the base come from decisions that do not hinge on macroeconomic variables (the central bank stops taking information from the economy) -- while aggregate demand is endogenous. The basic model used to get the first graph at the top of this post posits that both are endogenous.


  1. Please get your facts straight. Néstor Kirchner took office in 2003, not 2007, as you say. 2007 was the year of the intervention of the National Statistics Institute (INDEC). That was when official statistics started to differ from private measurements.

    1. I was referring to Cristina Fernández de Kirchner who took office in December of 2007 but I probably should have been more clear. News articles in the US implicate the current administration with hyperinflation more than the previous one.

      The point I was trying to make was that the hyperinflation problem may have started earlier than many believe. Hyperinflation takes some time to get started. However the model itself may not be correct (which I hope I clearly stated), so really all of the analysis should be taken with a grain of salt.

      Thank you for the information about the INDEC intervention; the 2008 date I used was based on the linked New York Times article. I imagine that is when the official and private statistics started to diverge beyond the error in the measurements.

      The INDEC intervention would give an excellent date to use for when inflation figures should start to diverge in the model. Interestingly the liquidity trap model and the hyperinflation model trends do start to strongly diverge at that time.

  2. " the populist Kirchner took office in December 2007"

    Debasing the money not populism.

  3. "Though their methodology is suspect -- how do you obtain a "black market" exchange rate? It would seem that there is a premium charged to wealthy individuals that wish to evade capital controls."

    The black market rate is not secret or hard to get. It is used by all sorts of common people, not just wealthy individuals. In hyperinflation a huge portion of the economy becomes black market. Times get too hard to pay the high taxes the government wants to collect. I really expect that the poor people go to the black market sooner than the rich people.

    The Cato methods are suspect, but not because the black market rate is hard to get. The problem is that they are using the foreign exchange rate to calculate price inflation. This is only right if there is a free and open market and the people inside are buying all their goods from outside, neither of which is true. It is not that good a measure of the current price inflation at the start of high inflation. The foreign exchange value of the currency drops faster at first and then this starts pushing prices up as foreigners buy up more stuff and local prices of imported goods go up. But there is a delay for foreign buying to drive up local prices. The longer the time period the more reasonable this becomes.

    1. Ny the way, if your plumber gave you a discount for paying cash, he is part of the black market.


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