A Fiscal Theory of Hyperdeflations? Some Surprising Monetarist Arithmetic
AbstractFor the range of "small" government deficits for which two stationary solutions exist, an increase in the deficit reduces the long-run rate of inflation if the locally-stable (high inflation) stationary equilibrium is chosen, increases it if the locally- unstable (low inflation) equilibrium is chosen. Explosive, unstable behavior always involves a steadily increasing negative rate of inflation, i.e. a "hyperdeflation." There always exist deficits so large that stationary solutions do not exist. Behavior then is unstable and explosive: hyperinflations are ruled out and hyperdeflations must result. Empirical studies of hyperinflations should no longer use the rational-expectations version of the Sargent-Wallace model as a theoretical backdrop. Copyright 1987 by Royal Economic Society.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Economic Papers.
Volume (Year): 39 (1987)
Issue (Month): 1 (March)
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Other versions of this item:
- Willem H. Buiter, 1985. "A Fiscal Theory of Hyperdeflations? Some Surprising Monetarist Arithmetic," NBER Technical Working Papers 0052, National Bureau of Economic Research, Inc.
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- Willem H. Buiter, 1999.
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