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Fiscal Consequences of Inflationary Policies


  • Keiichiro KOBAYASHI


In this paper we examine from a theoretical perspective the policy proposals made by Krugman (1998a) for the Japanese economy. The main finding is that the government's budget constraint implies that in order to realize long-term inflation, it is insufficient to just have the central bank issue currency; the reduction of the fiscal surplus is also necessary. In addition, I modify the Krugman model to a three-period model and show that in circumstances in which the nominal interest rate is zero, temporary deflation may be aggravated if fiscal policies remain unchanged and the central bank increases the money supply.

Suggested Citation

  • Keiichiro KOBAYASHI, 2002. "Fiscal Consequences of Inflationary Policies," Discussion papers 02010, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:02010

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    References listed on IDEAS

    1. Krugman, Paul, 2000. "Thinking About the Liquidity Trap," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 221-237, December.
    2. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
    3. Alan J. Auerbach & Maurice Obstfeld, 2005. "The Case for Open-Market Purchases in a Liquidity Trap," American Economic Review, American Economic Association, vol. 95(1), pages 110-137, March.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    6. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    7. Gauti B. Eggertsson & Michael Woodford, 2003. "Optimal Monetary Policy in a Liquidity Trap," NBER Working Papers 9968, National Bureau of Economic Research, Inc.
    8. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. A fiscal collapse is imminent – when? – sometime!
      by bill in Bill Mitchell - billy blog on 2012-04-13 11:39:59
    2. Japan – another week of humiliation for mainstream macroeconomics
      by bill in Bill Mitchell - billy blog on 2016-03-03 13:37:42

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