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A monetary approach of long run inflation. The case of Uruguay (1870-2010)

ISSNISSN/ISBN: 0041-3011
ISSNYear: 2016
AutorAuthor/s: Román, Carolina , Willebald, Henry , Brum, Conrado
EditorialEditorial: El Trimestre Económico (January-March 2016), 329
This paper aims at explaining the long-run inflation of Uruguay (1870-2010). A monetary inflation model is used based on the assumption that the long-run inflation results from the equilibrium conditions in the money market. A forward-looking Phillips curve is estimated where the inflation expectations are explained by the core money growth, which is defined as the growth of long-lasting component of nominal money supply that exceeds the long-run increase of the real money demand, this last one determined by the change of the potential output (output adjusted core money, OACM). The results show a positive and significant impact of OACM on inflation. Although in the short run it cannot be rejected that this effect is similar than the others, in the long run OACM has a unitary impact on inflation. In addition, we compare the OACM with the effective inflation and we construct a monetization index which enables us to identify processes of "demonetization" and "monetization" that the Uruguayan economy experienced along the last 140 years.
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