Abstract

Based on the disaggregation of the private sector as an amplification of the well-
-known Barro & Gordon policy-game model, a coordination and/or cooperation problem
of the price-setters in the private sector is identified as a possible cause for the persistence
of inflation even during stabilization efforts. This kind of persistence is, at least in the short-
-term, independent from the willingness of the government to stop inflation. A process of
self-fulfilling prophecies is started by the “wait-and-see” behavior of private sector’s price-
-setters, which can result in the giving up of the stabilization policy. Breaking this “wait-and-
-see” behavior could be one of the major problems in stabilizing economies with chronic
high inflation.

JEL Classification: E31; C70.