Requirement for a Different Model to Explain High-Inflation Economies

Spain's Pre-1999 Economy as an Example of a FlexNIT Regime

Consider an open economy during a historical period characterized by high, unpredictable inflation. The central bank's monetary policy is not guided by a pre-committed, publicly announced inflation rate, and the government frequently intervenes to manage the currency's value in foreign exchange markets. Why would a macroeconomic framework built on the core assumptions of a free-floating exchange rate and a central bank with a strict inflation-targeting mandate be a poor fit for analyzing this economy?

Evaluating a Macroeconomic Model's Applicability

A macroeconomic model that assumes an independent central bank with a strict inflation target is an appropriate tool for analyzing an economy with a flexible exchange rate, even if that economy experienced a prolonged period of high and volatile inflation in the 1970s and 1980s.

Critique of a Macroeconomic Model's Historical Application

Limitations of a Modern Macroeconomic Model