Journal zyxwvut of International Development: Vol. 6, No. 3, 259-273 (1 994) zy NON-NESTED HYPOTHESIS TESTING OF THEORIES OF INFLATION IN LATIN AMERICA ASIF DOWLA Division zyxwvuts of History and Social Sciences, zyxw St Mary’s College of Maryland, USA Abstract: There is a lively debate among the monetarists and the structuralists in explaining the persistence of inflation in Latin American countries. The monetarists point out the role of excess demand in generating inflation. On the other hand, the structuralists point out the role of structural factors; agricultural bottleneck, foreign trade bottleneck, and public sector bottlenecks in causing inflation. In this paper we conduct non-nested hypothesis testing of the structuralist and the monetarist theories of inflation using data for a set of Latin American countries. No general pattern emerges from the tests. In the case of individual country studies the results are mixed. For some countries the tests rank the monetarist model over the structuralist model, while for some others they either accept or reject both models. In the pooled sample there is even less variation in the results. In most of the cases the tests accept both models, suggesting that it is not possible to differentiate between the models. The results of the paper casts serious doubt on the applicability of monetarist and struc- turalist theories in explaining inflation in Latin America. The conclusion of the paper may be able to explain why in the past stabilization programmes based either on monetarist or structuralist ideas have failed miserably in controlling inflation in Latin America. zyxwvuts 1 INTRODUCTION One of the unique features of Latin American countries is the persistence of inflation. Some of the countries have a history of inflation that extends to one century. There have been numerous attempts at controlling inflation in these countries (see Cardoso and Finshlow, 1989). These stabilization programmes have led to the acceleration of inflation rather than reduction. The underlying theoretical basis of these stabilization programmes is either monetarism or structuralism, the two distinct schools of thought trying to explain inflation in Latin America. The monetarists emphasize the role of excess demand in generating inflation. The cause of the excess demand is the expansionary monetary and fiscal policy. The structuralists, on the other hand, stress the role of structural factors; agricultural CCC 0954-1748/94/030259-15 zyxwv 0 1994 by John Wiley zyxwvu & Sons, Ltd.