Hyperinflation and Stabilisation: Cagan Revisited
AbstractUsing a variant of the Cagan (1956) model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Alan Drazen and Elhanan Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semielasticity of demand for money to provide estimates of the maximum viable real deficit. Copyright 1997 by Royal Economic Society.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 107 (1997)
Issue (Month): 441 (March)
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Other versions of this item:
- Marcus Miller & Lei Zhang, 1995. "Hyperinflation and stabilization: Cagan revisited," International Finance Discussion Papers 529, Board of Governors of the Federal Reserve System (U.S.).
- Miller, Marcus & Zhang, Lei, 1996. "Hyperinflation and Stabilization: Cagan Revisited," CEPR Discussion Papers 1513, C.E.P.R. Discussion Papers.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Miller, Marcus & Zhang, Lei, 1996.
"Optimal target zones: How an exchange rate mechanism can improve upon discretion,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 20(9-10), pages 1641-1660.
- Miller, Marcus & Zhang, Lei, 1994. "Optimal Target Zones: How an Exchange Rate Mechanism Can Improve Upon Discretion," CEPR Discussion Papers 1031, C.E.P.R. Discussion Papers.
- Davies, Gareth & Vines, David, 1995. "Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?," CEPR Discussion Papers 1239, C.E.P.R. Discussion Papers.
- Prakash Loungani & Nathan Sheets, 1995.
"Central bank independence, inflation and growth in transition economies,"
International Finance Discussion Papers
519, Board of Governors of the Federal Reserve System (U.S.).
- Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-99, August.
- Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1.
- Atanas Christev, 2006.
Computing in Economics and Finance 2006
475, Society for Computational Economics.
- Atanas Christev, 2007. "Learning Hyperinflations," Money Macro and Finance (MMF) Research Group Conference 2006 126, Money Macro and Finance Research Group.
- Atanas Christev, 2005. "The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s," CERT Discussion Papers 0507, Centre for Economic Reform and Transformation, Heriot Watt University.
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