Hyperinflation and Stabilization: Cagan Revisited

CEPR Discussion Paper Series No. 1513

Posted: 24 Mar 1997

See all articles by Marcus H. Miller

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Lei Zhang

University of Warwick - Department of Economics

Date Written: November 1996

Abstract

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Drazen and Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semi- elasticity of demand for money to provide estimates of the maximum viable real deficit.

JEL Classification: E31, E62

Suggested Citation

Miller, Marcus H. and Zhang, Lei, Hyperinflation and Stabilization: Cagan Revisited (November 1996). CEPR Discussion Paper Series No. 1513, Available at SSRN: https://ssrn.com/abstract=3828

Marcus H. Miller (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3048/9 (Phone)
+44 24 7652 3032 (Fax)

Institute for International Economics

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lei Zhang

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 2983 (Phone)
+44 24 7652 3032 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
946
PlumX Metrics