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Hyperinflation and Stabilization: Cagan Revisited

Author

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  • Miller, Marcus
  • Zhang, Lei

Abstract

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Drazen and Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semi-elasticity of demand for money to provide estimates of the maximum viable real deficit.

Suggested Citation

  • Miller, Marcus & Zhang, Lei, 1996. "Hyperinflation and Stabilization: Cagan Revisited," CEPR Discussion Papers 1513, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1513
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    Cited by:

    1. Atanas Christev, 2006. "Learning Hyperinflations," Computing in Economics and Finance 2006 475, Society for Computational Economics.
    2. Atanas Christev, 2005. "The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s," CERT Discussion Papers 0507, Centre for Economic Reform and Transformation, Heriot Watt University.

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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