Political Stabilization Cycles in High Inflation Economies
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High inflation economies do not always exhibit smooth inflationary processes; sometimes stop-go cycles of inflation are observed. This paper relates these stop-go episodes to a political cycle: Governments can defer inflation until after elections to increase their chances of being reelected. This is modelled as a two-period game of incomplete information where voters try to pick the most competent candidate, and inflation (which is used as a signal of competency) can be lowered by the government in the short run through foreign debt accumulation.