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Revisiting Speculative Hyperinflations in Monetary Models

Listed author(s):
  • Obstfeld, Maurice
  • Rogoff, Kenneth

This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Obstfeld and Rogoff (1983, 1986) argue that in pure fiat money models, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency, indeed the backing does not have to be certain. Cochrane (2011), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. He goes on to claim that the fiscal theory of the price level provides a much better model of the price-level determination that avoids the multiplicity of problems that plague standard monetary models. We show here why, in fact, Cochrane's analysis is incorrect, and that the equilibrium he considers fails. Our baseline analysis uses a canonical money-in-the-utility-function setup building on Brock (1974, 1975); but following Wallace (1981), we show the same results go through in the overlapping-generations model of money. We go on to discuss why we believe that the fiscal theory of the price level simply sidesteps the problem of monetary determinacy but in no way resolves it.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 12051.

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Date of creation: May 2017
Handle: RePEc:cpr:ceprdp:12051
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  1. Marco Bassetto, 2002. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 70(6), pages 2167-2195, November.
  2. Obstfeld, Maurice, 1984. "Multiple Stable Equilibria in an Optimizing Perfect-Foresight Model," Econometrica, Econometric Society, vol. 52(1), pages 223-228, January.
  3. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  4. repec:spo:wpecon:info:hdl:2441/8712 is not listed on IDEAS
  5. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
  7. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
  8. 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, vol. 20(1), pages 83-103, February.
  9. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-687, August.
  10. Philippe Weil, 2008. "Overlapping Generations: The First Jubilee," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 115-134, Fall.
  11. Christopher A. Sims, 2013. "Paper Money," American Economic Review, American Economic Association, vol. 103(2), pages 563-584, April.
  12. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
  13. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
  14. 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, vol. 15(3), pages 750-777, October.
  15. Matthew B. Canzoneri & Dale W. Henderson & Kenneth S. Rogoff, 1983. "The Information Content of the Interest Rate and Optimal Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 545-566.
  16. Wallace, Neil, 1981. "A hybrid fiat--Commodity monetary system," Journal of Economic Theory, Elsevier, vol. 25(3), pages 421-430, December.
  17. Philippe Weil, 2008. "Overlapping Generations: the First Jubilee," Post-Print hal-01022015, HAL.
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