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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 government fs 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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  20. 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.
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  24. Ali Darrat, 2000. "Are budget deficits inflationary? A reconsideration of the evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 633-636.
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