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Hyperinflation and stabilization: Cagan revisited

Author

Listed:
  • Marcus Miller
  • Lei Zhang

Abstract

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.

Suggested Citation

  • Marcus Miller & Lei Zhang, 1995. "Hyperinflation and stabilization: Cagan revisited," International Finance Discussion Papers 529, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:529
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1995/529/default.htm
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    References listed on IDEAS

    as
    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. 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.
    3. Miller, Marcus & Zhang, Lei, 1996. "Optimal target zones: How an exchange rate mechanism can improve upon discretion," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1641-1660.
    4. 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 381-399, August.
    5. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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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

    Europe; Eastern ; Inflation (Finance);

    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

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