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The Dynamics of Inflation with Constant Deficit under Expected Regime Change

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  • Bental, Benjamin
  • Eckstein, Zvi

Abstract

A model that describes the dynamics of inflation with a fully anticipated stabilization program is developed. It is shown that with a constant deficit, an economy tends to stay at the neighborhood of the lower of the two state inflation rates that are compatible with the deficit. Further, increasing inflation rates prior to the stabilization are compatible only with deficits that are lower than the maximal feasible staedy- state deficits, and with a stabilization program that reduces the demand for real balances. If these conditions are not met, inflation decreases towards the stabilization date. It is argued that the data generated by actual inflationary episodes fit the conditions described above and corroborate the model.

Suggested Citation

  • Bental, Benjamin & Eckstein, Zvi, 1988. "The Dynamics of Inflation with Constant Deficit under Expected Regime Change," Foerder Institute for Economic Research Working Papers 275455, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275455
    DOI: 10.22004/ag.econ.275455
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    Cited by:

    1. Eckstein, Zvi & Leiderman, Leonardo, 1992. "Seigniorage and the welfare cost of inflation: Evidence from an intertemporal model of money and consumption," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 389-410, June.
    2. Gomis-Porqueras, Pere & Haro, Alex, 2007. "Global bifurcations, credit rationing and recurrent hyperinflations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 473-491, February.
    3. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    4. Thomas Sargent & Joseph Zeira, 2011. "Israel 1983: A bout of unpleasant monetarist arithmetic?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 419-431, July.
    5. Emanuel Barnea & Nissan Liviatan, 2008. "The chronic inflation process: a model and evidence from Brazil and Israel," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 11(2), pages 151-162.
    6. Arce, Oscar J., 2009. "Speculative hyperinflations and currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1808-1823, October.

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    Keywords

    Financial Economics;

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