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Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the use of Money

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  • Vázquez Pérez, Jesús
  • Gutiérrez Huerta, María José

Abstract

This paper analyzes the existence of an inflation tax Laffer curve (ITLC) in the context of two standard optimizing monetary models: a cash-in-advance model and a money in the utility function model. Agents’ preferences are characterized in the two models by a constant relative risk aversion utility function. Explosive hyperinflation rules out the presence of an ITLC. In the context of a cash-in-advance economy, this paper shows that explosive hyperinflation is feasible and thus an ITLC is ruled out whenever the relative risk aversion parameter is greater than one. In the context of an optimizing model with money in the utility function, this paper firstly shows that an ITLC is ruled out. Moreover, it is shown that explosive hyperinflations are more likely when the transactions role of money is more important. However, hyperinflationary paths are not feasible in this context unless certain restrictions are imposed.

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Bibliographic Info

Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2002-27.

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Date of creation: Jul 2002
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Handle: RePEc:ehu:dfaeii:200227

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Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: inflation tax; hyperinflation; Laffer curve;

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References

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  1. Taylor, Mark P, 1991. "The Hyperinflation Model of Money Demand Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(3), pages 327-51, August.
  2. Sargent, Thomas J, 1977. "The Demand for Money During Hyperinflations under Rational Expectations: I," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 59-82, February.
  3. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 195, Board of Governors of the Federal Reserve System (U.S.).
  4. Tang, D.P. & Wang, P., 1993. "On Relative Price Variability and Hyperinflation," Papers, Pennsylvania State - Department of Economics 5-93-5, Pennsylvania State - Department of Economics.
  5. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1875, C.E.P.R. Discussion Papers.
  6. Kiguel, Miguel A, 1989. "Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 21(2), pages 148-57, May.
  7. Kiguel, Miguel A & Neumeyer, Pablo Andres, 1995. "Seigniorage and Inflation: The Case of Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(3), pages 672-82, August.
  8. Buiter, Willem H, 1987. "A Fiscal Theory of Hyperdeflations? Some Surprising Monetarist Arithmetic," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 111-18, March.
  9. Casella, Alessandra & Feinstein, Jonathan S, 1990. "Economic Exchange during Hyperinflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(1), pages 1-27, February.
  10. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 19(1), pages 19-32, February.
  11. Calvo, Guillermo A & Leiderman, Leonardo, 1992. "Optimal Inflation Tax under Precommitment: Theory and Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 179-94, March.
  12. Phylaktis, Kate & Taylor, Mark P, 1993. "Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 32-37, February.
  13. Bruno, Michael, 1989. "Econometrics and the Design of Economic Reform," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 275-306, March.
  14. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 353-74, May.
  15. Vazquez, Jesus, 1998. "How high can inflation get during hyperinflation? A transaction cost demand for money approach," European Journal of Political Economy, Elsevier, Elsevier, vol. 14(3), pages 433-451, August.
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Cited by:
  1. Alexandre Sokic, 2008. "Theoretical support for a new class of demand for real cash balances in explosive hyperinflations," Working Papers of BETA 2008-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Alexandre Sokic, 2008. "Modelling the transaction role of money and the essentiality of money in a hyperinflation context," Working Papers of BETA 2008-12, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Sokic, Alexandre, 2010. "The monetary analysis of hyperinflation and the appropriate specification of the demand for money," MPRA Paper 21503, University Library of Munich, Germany.

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