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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://128.118.178.162/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://128.118.178.162

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  1. Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," NBER Working Papers 8930, National Bureau of Economic Research, Inc.
  2. Andrew Atkeson & Patrick Kehoe, 2004. "Deflation and Depression: Is There and Empirical Link?," NBER Working Papers 10268, National Bureau of Economic Research, Inc.
  3. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
  4. Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
  5. Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
  6. John H. Cochrane, 1998. "Long-term Debt and Optimal Policy in the Fiscal Theory of the Price Level," CRSP working papers 478, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  8. John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," NBER Working Papers 6646, National Bureau of Economic Research, Inc.
  9. Narayana Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
  10. Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 634-649, November.
  11. Thomas J. Sargent, 1981. "The ends of four big inflations," Working Papers 158, Federal Reserve Bank of Minneapolis.
  12. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
  13. 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.
  14. Alesina, Alberto & Cukierman, Alex, 1990. "The Politics of Ambiguity," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 829-50, November.
  15. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Papers 7884, National Bureau of Economic Research, Inc.
  16. Niepelt, Dirk, 2002. "The Fiscal Myth of the Price Level," Seminar Papers 710, Stockholm University, Institute for International Economic Studies.
  17. 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.
  18. David B. Gordon & Eric M. Leeper, 2002. "The Price Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level," NBER Working Papers 9084, National Bureau of Economic Research, Inc.
  19. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  20. 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.
  21. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  22. 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.
  23. repec:cup:cbooks:9780521027922 is not listed on IDEAS
  24. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
  25. McCallum, Bennett T., 2001. "Indeterminacy, bubbles, and the fiscal theory of price level determination," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 19-30, February.
  26. Ali Darrat, 2000. "Are budget deficits inflationary? A reconsideration of the evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 633-636.
  27. 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.
  28. 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.
  29. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  30. repec:cup:cbooks:9780521233293 is not listed on IDEAS
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