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Hyperinflation and Stabilization: Cagan Revisited

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  • Miller, Marcus
  • Zhang, Lei

Abstract

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Drazen and Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semi-elasticity of demand for money to provide estimates of the maximum viable real deficit.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1513.

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Date of creation: Nov 1996
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Handle: RePEc:cpr:ceprdp:1513

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Related research

Keywords: Fiscal Stabilization; Hyperinflation; Seigniorage; Stochastic Deficits;

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References

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  1. Davies, Gareth & Vines, David, 1995. "Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?," CEPR Discussion Papers 1239, C.E.P.R. Discussion Papers.
  2. Miller, Marcus & Zhang, Lei, 1994. "Optimal Target Zones: How an Exchange Rate Mechanism Can Improve Upon Discretion," CEPR Discussion Papers 1031, C.E.P.R. Discussion Papers.
  3. Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-99, August.
  4. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, July.
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Cited by:
  1. Atanas Christev, 2007. "Learning Hyperinflations," Money Macro and Finance (MMF) Research Group Conference 2006 126, Money Macro and Finance Research Group.
  2. Atanas Christev, 2005. "The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s," CERT Discussion Papers 0507, Centre for Economic Reform and Transformation, Heriot Watt University.

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