A Markov-Switching Model of Inflation in Bolivia

The Bolivian inflation process is analyzed utilizing a time-varying univariate and multivariate Markov-switching model (TMS). With monthly data and, beginning in the late 1930s, accurately described by TMS. intercept for high-inflation regime significantly higher than low-inflation actual rate mirrors smoothing probabilities of Markov process. Additionally, predicted duration each closely fits periods when country experienced low inordinate high rates. From long-run perspective TMS, results generally fall line with what quantity theory money predicts. In regime, growth increases (almost) one-for-one, as classical economics contends. short-run almost exclusively explained negative output gap. lagged most important determinant inflation, price stickiness expectations. Partitioning sources demonstrate that, from differences are mostly GDP growth; velocity principal factors explaining variance inflation. perspective, gap explains all regression past does same during times though both cases R2 which precludes making definite statements about variability