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Fiscal Consequences of Inflationary Policies

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  • Keiichiro KOBAYASHI

Abstract

In this paper we examine from a theoretical perspective the policy proposals made by Krugman (1998a) for the Japanese economy. The main finding is that the government's budget constraint implies that in order to realize long-term inflation, it is insufficient to just have the central bank issue currency; the reduction of the fiscal surplus is also necessary. In addition, I modify the Krugman model to a three-period model and show that in circumstances in which the nominal interest rate is zero, temporary deflation may be aggravated if fiscal policies remain unchanged and the central bank increases the money supply.

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File URL: http://www.rieti.go.jp/jp/publications/dp/02e010.pdf
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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 02010.

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Length: 14 pages
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:eti:dpaper:02010

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  1. Auerbach, Alan J. & Obstfeld, Maurice, 2012. "The Case for Open-Market Purchases in a Liquidity Trap," Center for International and Development Economics Research, Working Paper Series qt84s7d8c8, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  3. Krugman, Paul, 2000. "Thinking About the Liquidity Trap," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 221-237, December.
  4. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  5. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
  6. Gauti B. Eggertsson & Michael Woodford, 2003. "Optimal Monetary Policy in a Liquidity Trap," NBER Working Papers 9968, National Bureau of Economic Research, Inc.
  7. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
  8. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
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Blog mentions

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  1. A fiscal collapse is imminent – when? – sometime!
    by bill in Bill Mitchell – billy blog on 2012-04-13 06:39:59

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