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High Inflation and the Nominal Anchors of an Open Economy

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  • Michael Bruno

Abstract

A high inflation process is usually due to a real imbalance and cannot be cured without a correction of real furamenta1s. Yet it can be characterized as a quasi-stable nominal process which gets divorced from the real system in what Patinkin could call a valid classical dichotomy. This paper extends the existing seignorage model approach to multiple inflationary equilibria by rationalizing a high inflation equilibrium as well as its stability as the outcomes of sub-optimization by a 'soft' government. It considers the advantages as well as the weaknesses of using the exchange rate as the key nominal anchor in the various stages of stabilization to low (or zero) inflation. Finally the rationale for using multiple nominal anchors is also discussed. Applications of the theoretical arguments are illustrated from recent high inflation and stabilization experience.

Suggested Citation

  • Michael Bruno, 1990. "High Inflation and the Nominal Anchors of an Open Economy," NBER Working Papers 3518, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3518 Note: ITI IFM
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    References listed on IDEAS

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    1. Robert J. Barro, 1983. "Inflationary Finance under Discretion and Rules," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 1-16, February.
    2. Bruno, Michael, 1989. "Econometrics and the Design of Economic Reform," Econometrica, Econometric Society, vol. 57(2), pages 275-306, March.
    3. Rudiger Dornbusch, 1985. "Inflation, Exchange Rates and Stabilization," NBER Working Papers 1739, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Miguel Kiguel, 1994. "Exchange Rate Policy, the Real Exchange Rate, and Inflation," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(93), pages 229-250.
    2. Ozatay, Fatih, 2000. "A quarterly macroeconometric model for a highly inflationary and indebted country: Turkey," Economic Modelling, Elsevier, vol. 17(1), pages 1-11, January.
    3. Huff, Gregg & Majima, Shinobu, 2013. "Financing Japan's World War II Occupation of Southeast Asia," The Journal of Economic History, Cambridge University Press, vol. 73(04), pages 937-977, December.
    4. Lin, Shu & Ye, Haichun, 2011. "The role of financial development in exchange rate regime choices," Journal of International Money and Finance, Elsevier, vol. 30(4), pages 641-659, June.
    5. Kiguel, Miguel A., 1992. "Exchange rate policy, the real exchange rate, and inflation : lessons from Latin America," Policy Research Working Paper Series 880, The World Bank.
    6. Alberto Carrasquilla, 1996. "Dimensiones Fiscales De Una Inflación Moderada: El Caso Colombiano," BORRADORES DE ECONOMIA 002357, BANCO DE LA REPÚBLICA.
    7. Alberto Carrasquilla, 1996. "Dimensiones Fiscales de una Inflación Moderada: El Caso Colombiano," Borradores de Economia 055, Banco de la Republica de Colombia.

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