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Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation

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  • Kiguel, Miguel A
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    Abstract

    Hyperinflationary processes usually occur in countries with extremely large budget deficits. In models of inflationary finance with rational expectations (e.g., Buiter [1987]), large budget deficits cannot lead to hyperinflation. The purpose of this paper is to reconcile the standard theoretical model with the stylized facts. It shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model, large budget deficits are indeed the main reason for hyperinflation. The paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing. Copyright 1989 by Ohio State University Press.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 21 (1989)
    Issue (Month): 2 (May)
    Pages: 148-57

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    Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:2:p:148-57

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Kiguel, Miguel A. & Neumeyer, Pablo Andres, 1989. "Inflation and seigniorage in Argentina," Policy Research Working Paper Series 289, The World Bank.
    2. Viktoria Hnatkovska & Amartya Lahiri & Carlos A. Vegh, 2008. "Interest Rates and the Exchange Rate: A Non-Monotonic Tale," NBER Working Papers 13925, National Bureau of Economic Research, Inc.
    3. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    4. Diehl, Markus, 1993. "Stabilization without crisis: The case of Vietnam," Kiel Working Papers 578, Kiel Institute for the World Economy.
    5. PEKARSKI, Sergei, 2008. "Budget deficits and inflation feedback," CORE Discussion Papers 2008054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Vazquez, Jesus, 1998. "How high can inflation get during hyperinflation? A transaction cost demand for money approach," European Journal of Political Economy, Elsevier, vol. 14(3), pages 433-451, August.
    7. Ruge-Murcia, Francisco J., 1999. "Government expenditure and the dynamics of high inflation," Journal of Development Economics, Elsevier, vol. 58(2), pages 333-358, April.
    8. Easterly, William & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1992. "Money demand and seignorage - maximizing inflation," Policy Research Working Paper Series 1049, The World Bank.
    9. Zink, Helmut, 1993. "Stability problems in hyperinflation models," Discussion Papers, Series 1 268, University of Konstanz, Department of Economics.
    10. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).
    11. Vázquez Pérez, Jesús & Gutiérrez Huerta, María José, 2002. "Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the use of Money," DFAEII Working Papers 2002-27, University of the Basque Country - Department of Foundations of Economic Analysis II.
    12. Alexandre Sokic, 2007. "Monetary hyperinflations and money essentiality," Working Papers of BETA 2007-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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