research articles : Destabilizing effects of a successful stabilization: a forward-looking explanation of the second Hungarian hyperinflation

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research articles : Destabilizing effects of a successful stabilization: a forward-looking explanation of the second Hungarian hyperinflation

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Beatrix Paal () (Department of Economics, Cornell University, Uris Hall, Ithaca, NY 14853, USA)

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Beatrix Paal

Abstract

The extreme severity of the second Hungarian hyperinflation is argued to be related to the unusual way in which the inflation was eventually stabilized. The historical features of this episode are represented in a general equilibrium model, which incorporates a transition from one monetary regime to another. During the inflation the government finances a fixed deficit with seigniorage revenue. After the stabilization the government budget is balanced and the central bank engages in a program of subsidized lending to the private sector. Stabilization is achieved by targeting a low inflation rate path through adjustments in the quantity of central bank lending. I show that under this stabilization policy (1) the dynamic equilibrium path of the economy is indeterminate and (2) arbitrarily high pre-stabilization inflation rates are possible.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 15 (2000)
Issue (Month): 3 ()
Pages: 599-630
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Handle: RePEc:spr:joecth:v:15:y:2000:i:3:p:599-630

Note: Received: November 5, 1998; revised version: November 30, 1998
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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
N14 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Europe: 1913-

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