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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

Related research

Keywords: Hyperinflation Hysteresis Fiscal-monetary reform Multiple equilibria;

References

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  18. 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.
  19. 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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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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