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Budget deficits and inflation feedback

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Author Info
Sergey Pekarski () (Centre for Advanced Studies and Laboratory for Macroeconomic Analysis, State University – Higher School of Economics, Moscow.)
Abstract

This paper contributes to the literature on budget deficits and inflation in high inflation economies. The main finding is that recurrent outbursts of extreme inflation in these economies can be explained by a certain hysteresis effect associated with public finance. This interpretation meets the evidence that dramatic shifts between regimes of moderately high and extremely high (hyper-) inflation often occur without visible deterioration in public finance or abrupt shifts in fiscal and monetary policies. The existence of the hysteresis effect is explicitly explained by the work of two mechanisms: the arithmetic associated with the wrong side of the inflation tax Laffer curve and the Patinkin effect (the reverse of the much more-cited Olivera-Tanzi effect). It is also shown that the division of the operational budget deficit into the part that is subject to negative inflation feedback and the inflation-proof part has implications for both the discussion of inflationary consequences of budget deficits and the proper design of stabilization policy.

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Paper provided by CAS in its series Working Papers with number WP13_2007_12.

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Length: 36 pages
Date of creation: Jan 2007
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Handle: RePEc:cas:wpaper:wp13_2007_12

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Related research
Keywords: budget deficit high inflation the Patinkin effect.

Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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