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The Political Economy of Stopping High Inflation

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  • Martin Paldam

Abstract

First the process of high inflation is described. The theory presented is built around nine stylized facts. The high inflations have always political explanations and strong political consequences. Two traditional cures for high inflation are to apply a nominal anchor: Fix the money stock by closing the budget dificit or fix the nominal exchange rate. In both cases the braking is painful, and it often breaks down. The third traditional cure is an incomes policy, which often works in the short run, but not in the long run. By combining a hard incomes policy with a closing of the budget deficit and a fixed exchange rate, it is possible, but not easy, to stop high inflation painlessly. Finally institutional reform is discussed.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 93-05.

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Handle: RePEc:kud:epruwp:93-05

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Cited by:
  1. C. Emre Alper, 2001. "The Turkish Liquidity Crisis of 2000: What Went Wrong..," Working Papers 2001/11, Bogazici University, Department of Economics.
  2. Daniel Arce, 1997. "Fiscal Pacts," Open Economies Review, Springer, vol. 8(3), pages 271-284, July.
  3. Peter Bernholz & Peter Kugler, 2009. "The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations," German Economic Review, Verein für Socialpolitik, vol. 10, pages 165-175, 05.

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