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Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?

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  • Obstfeld, Maurice
  • Rogoff, Kenneth S.

Abstract

This paper uses an infinite-horizon model based on individual maximizing behavior to study whether explosive price-level paths unrelated to monetary growth--speculative hyperinflations--can be equilibrium paths under rational expectations. In a pure fiat money regime, speculative hyperinflations can be excluded only through severe restrictions on individual preferences; but when the government fractionally backs the currency by guaranteeing a minimal real redemption value for money, speculative hyperinflations are impossible, even if agents are not completely certain that they can redeem their money in any given period. The analysis also confirms that implosive price-level paths and divergent paths for capital asset prices are not equilibria under either monetary regime.

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File URL: http://dash.harvard.edu/bitstream/handle/1/12491027/Rogoff_SpeculativeHyperinflations.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 12491027.

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Date of creation: 1983
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Publication status: Published in Journal of Political Economy -Chicago-
Handle: RePEc:hrv:faseco:12491027

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  1. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 45(6), pages 1377-85, September.
  2. Anonymous, 1978. "Gasohol from Grain- The Economic Issues," Economics Statistics and Cooperative Services (ESCS) Reports, United States Department of Agriculture, Economic Research Service 142842, United States Department of Agriculture, Economic Research Service.
  3. Brock, William A. & Scheinkman, J. A., 1979. "Some Remarks on Monetary Policy in an Overlapping Generations Model," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 246, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  5. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 1-38, February.
  6. Calvo, Guillermo A., 1978. "On the indeterminacy of interest rates and wages with perfect foresight," Journal of Economic Theory, Elsevier, Elsevier, vol. 19(2), pages 321-337, December.
  7. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 12(4), pages 517-33, December.
  8. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr.
  9. Rodriguez, Carlos Alfredo, 1980. "The Role of Trade Flows in Exchange Rate Determination: A Rational Expectations Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1148-58, December.
  10. Gray, Jo Anna, 1984. "Dynamic Instability in Rational Expectations Models: An Attempt to Clarify," 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. 25(1), pages 93-122, February.
  11. Martin L. Weitzman, 1973. "Duality Theory for Infinite Horizon Convex Models," Management Science, INFORMS, INFORMS, vol. 19(7), pages 783-789, March.
  12. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(4), pages 745-70, August.
  13. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," 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. 15(3), pages 750-77, October.
  14. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 1(2), pages 133-150, April.
  15. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, Econometric Society, vol. 41(6), pages 1043-48, November.
  16. Maurice Obstfeld, 1981. "Inflation, Real Interest, and the Determinacy of Equilibrium in an Optimizing Framework," NBER Working Papers 0723, National Bureau of Economic Research, Inc.
  17. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," 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. 20(1), pages 83-103, February.
  18. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 78(2), pages 280-304.
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