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The monetary model of hyperinflation : limits of the model validity

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  • Alexandre SOKIC

    (Centre Interdisciplinaire de Recherche sur le Commerce Extérieur et l’Economie Ecole Supérieure du Commerce Extérieur Pôle Universitaire Léonard de Vinci 92916 Paris La Défense)

Abstract

The Cagan monetary model of hyperinflation has a relatively simple structure and a rich set of solutions. However, the wealth of possible solutions of this model does not constitute an asset for it. The introduction of rational expectations into the model was often at the origin of these validity problems as shown in Buiter (1987) or Kiguel (1989). Then, this model has usually been associated with the adaptive expectations assumption in the literature. In the same spirit Evans (1995) stressed that the assumption of adaptive expectations is a sufficient condition to ensure its validity. This articles aims at highlighting the strict association met in the literature between the assumption of adaptive expectations and the correct running of the monetary model of hyperinflation. A complete resolution of the model under the assumption of adaptive expectations is carried out. This approach completes the analyses made in Bruno & Fisher (1987, 1990), taken up again in Blanchard and Fischer (1990) and still recently in Walsh (2003). The aim is to show that the way inflationary expectations are formed is not crucial for the validity of the model. Rather crucial is the adjustment lag of real cash balances to their desired level

Suggested Citation

  • Alexandre SOKIC, 2007. "The monetary model of hyperinflation : limits of the model validity," Money Macro and Finance (MMF) Research Group Conference 2006 38, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:38
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    Keywords

    hyperinflation; seigniorage; hyperinflationary bubbles;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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