Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the use of Money
AbstractThis 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. Agentsâ€™ 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 InfoPaper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2002-27.
Date of creation: Jul 2002
Date of revision:
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
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
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