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The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level

  • Taiji Harashima

    (University of Tsukuba and Cabinet Office of Japan)

The paper explores a fundamental mechanism of inflation by explicitly including a governmentfs optimization problem into a general equilibrium model assuming a Leviathan government. The result is clear- cut and beautiful: inflation is caused by the difference of the time preference rates between a government and households. This is an inevitable consequence of heterogeneity in time preference rates between a government and households. The model can be seen as a unified model that explains various types of inflation, e.g. hyperinflation, chronic inflation, disinflation and deflation, by this single mechanism. The model shows that inflation has the intrinsic nature of persistence, i.e. inflation rates have a unit root.

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File URL: http://econwpa.repec.org/eps/mac/papers/0409/0409018.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0409018.

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Length: 44 pages
Date of creation: 21 Sep 2004
Date of revision: 23 Sep 2004
Handle: RePEc:wpa:wuwpma:0409018
Note: Type of Document - pdf; pages: 44
Contact details of provider: Web page: http://econwpa.repec.org

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  10. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
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  19. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  20. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
  21. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "The fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 22-32.
  22. Willem Buiter, 2004. "A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos," NBER Working Papers 10524, National Bureau of Economic Research, Inc.
  23. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
  24. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922.
  25. Bennett T. McCallum, 2003. "Is the Fiscal Theory of the Price Level Learnable?," NBER Working Papers 9961, National Bureau of Economic Research, Inc.
  26. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  27. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
  28. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University.
  29. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
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