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Hyperinflation and stabilization: Cagan revisited

  • Marcus Miller
  • Lei Zhang

In this paper Cagan's analysis of hyperinflations is adapted to look at sit­uations where the deficits to be financed by money creation are large and variable, but fiscal stabilisation is expected--features found in some of the republics of the Former Soviet Union soon after independence. The impact of various stabilisation policies on real balances and inflation expectations is studied, assuming expectations are rational and deficits follow a geometric Brownian motion until the stabilisation takes place. For a modified form of Cagan's demand function we are able to obtain explicit solutions using Ito's Lemma; these are calibrated to give numerical estimates of the effects of expected fiscal stabilisation.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/529/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/529/ifdp529.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 529.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:529
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  1. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, August.
  2. Miller, Marcus & Zhang, Lei, 1994. "Optimal Target Zones: How an Exchange Rate Mechanism Can Improve Upon Discretion," CEPR Discussion Papers 1031, C.E.P.R. Discussion Papers.
  3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, April.
  4. Davies, Gareth & Vines, David, 1995. "Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?," CEPR Discussion Papers 1239, C.E.P.R. Discussion Papers.
  5. Loungani, Prakash & Sheets, Nathan, 1997. "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 381-99, August.
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