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Speculative hyperinflations and currency substitution

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  • Arce, Oscar J.

Abstract

We propose a rational expectations framework for understanding speculative hyperinflations that end in response to 'orthodox' stabilization programs. Motivated by a strong degree of hysteresis in the stock of real balances after the end of hyperinflations, we provide a cash-and-credit model in which the money demand exhibits persistence because individuals can establish long-lasting credit relationships. We use the model to show that if hysteresis in real balances is possible then a fiscal-monetary reform that successfully stops a speculative hyperinflation may fail to prevent it. We argue that speculative hyperinflationary equilibria are consistent with some key stylized facts observed in extreme hyperinflations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 10 (October)
Pages: 1808-1823

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:10:p:1808-1823

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Hyperinflation Hysteresis Fiscal-monetary reform Multiple equilibria;

References

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  1. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation," IMF Working Papers 01/74, International Monetary Fund.
  2. Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
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  7. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
  8. Sachs, Jeffrey, 1987. "The Bolivian Hyperinflation and Stabilization," American Economic Review, American Economic Association, vol. 77(2), pages 279-83, May.
  9. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  10. Eckstein, Zvi & Leiderman, Leonardo, 1992. "Seigniorage and the welfare cost of inflation: Evidence from an intertemporal model of money and consumption," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 389-410, June.
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  13. Peter N. Ireland, 1992. "Endogenous financial innovation and the demand for money," Working Paper 92-03, Federal Reserve Bank of Richmond.
  14. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
  15. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2725-2748, December.
  16. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries," IMF Working Papers 92/40, International Monetary Fund.
  17. Kiguel, Miguel A & Neumeyer, Pablo Andres, 1995. "Seigniorage and Inflation: The Case of Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 672-82, August.
  18. Mondino, Guillermo & Sturzenegger, Federico & Tommasi, Mariano, 1996. "Recurrent High Inflation and Stabilization: A Dynamic Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 981-96, November.
  19. Nicolini, Juan Pablo, 1996. "Ruling out speculative hyperinflations The role of the government," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 791-809, May.
  20. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 353-74, May.
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Cited by:
  1. Alexandre Sokic, 2012. "The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money," German Economic Review, Verein für Socialpolitik, vol. 13(2), pages 142-160, 05.

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