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Speculative hyperinflations and currency substitution

  • Arce, Oscar J.

We propose a rational expectations framework for understanding speculative hyperinflations that end in response to 'orthodox' stabilization programs. Motivated by a strong degree of hysteresis in the stock of real balances after the end of hyperinflations, we provide a cash-and-credit model in which the money demand exhibits persistence because individuals can establish long-lasting credit relationships. We use the model to show that if hysteresis in real balances is possible then a fiscal-monetary reform that successfully stops a speculative hyperinflation may fail to prevent it. We argue that speculative hyperinflationary equilibria are consistent with some key stylized facts observed in extreme hyperinflations.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 10 (October)
Pages: 1808-1823

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:10:p:1808-1823
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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