budget deficits stability and the monetary dynamics of hyperinflation hyperinflationary processes usually occur in countries with extremely large budget deficits in models of inflationary finance with rational expectations e g buiter 1987 large budget deficits cannot lead to hyperinflation the purpose of this paper is to reconcile the standard theoretical model with the stylized facts it shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model large budget deficits are indeed the main reason for hyperinflation the paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing copyright 1989 by ohio state university press

fiscal reforms and stabilisation four hyperinflation cases examined this paper discusses a hypothesis that is common to several recent explanations for the needs of hyperinflations of the 1920s namely that fiscal reforms had been responsible for their sudden end it is suggested that the very presence of these reforms can be disputed once evidence is provided on the fact that budget deficits were mostly caused by the so called oliveira tanzi effect i e deficits were mostly generated by inflation itself some observations are offered on other issues to be addressed if an alternative explanation for the stabilizations are to be found copyright 1990 by royal economic society

historical experiences with flexible exchange rates a simulation of common qualitative characteristics abstract this paper develops an analytical model of price and exchange rate determination which formalizes the evolution of the money supply expectations process calibration and simulation of the model demonstrates its ability to replicate certain stylized facts that characterize 17 historical experiences with flexible currency prices under inflationary conditions furthermore the model proves capable of tracing actual prices and exchange rates in a number of selected historical cases rather than treating each experience as a singular historical event the paper thus constitutes a step towards a general account of the rich experience with flexible exchange rates during the last two centuries

hyperinflations their origins development and termination abstract this paper summarizes and critically surveys research on hyperinflation appraisal and review of the literature considers the origins development termination and the lessons to be learned from hyperinflations the historical evidence as well as the econometric evidence is analyzed it is concluded that while the lessons to be learned from such episodes perhaps have been overstated a number of useful implications may be derived from studying hyperinflations such as an understanding of the forces which link monetary and fiscal policies to inflation and policy makers role in influencing individuals expectations

process consistency and monetary reform some further evidence abstract in this paper we provide additional evidence that process consistency may have materialized as a restrictive constraint on the money generation process in addition to recomputing the time series of process consistency probabilities using new data from the german case we also supply our empirical technique to the data from the other hyperinflations studied by cagan the results are consistent with our earlier conclusions in extreme hyperinflation process consistency may have materialized as a restrictive constraint on the money generation process

cagan s hypothesis and the first nationwide inflation of paper money in world history more than 25 years ago phillip cagan proposed the hypothesis that the demand for real cash balances depended mainly on the expected rate of inflation provided that the monetary sector was sufficiently isolated from changes in the real sector cagan 1956 to test his hypothesis cagan studied seven hyperinflations in modern europe during which variations in the real variables were negligible compared with the astronomical increases in prices it is well known that he got confirmatory results from his studies however until recently it has not been realized that the same hypothesis is also strongly supported by data from a very different socioeconomic context namely the first nationwide inflation of paper money in world history paper money was invented in china in the northern suing dynasty a d 960 1126 and widely used in the southern sung dynasty a d 1127 1278 the first inflation on a national scale occurred from around 1190 to the end of the dynasty when the monetary system collapsed in this inflation period available historical records do not suggest significant expansion of the economy or important changes in real income modern financial assets such as bonds and equities did

the austral plan in recent years several countries have experienced extremely rapid inflations but without total collapses of the national currencies argentina was one of those cases by mid 1985 the rate of price increase exceeded 30 percent per month however prices continued to be set in pesos and there remained a sizeable volume of short term nominal contracts the treatment of such inflations poses several questions what is the desirable speed of disinflation what mix of instruments can effectively act on prices without causing an excessive fall in real income how can prices be kept on a stable or moderately rising trend the austral plan announced in june 1985 combined fiscal measures with a price wage freeze and a monetary reform linked to a system for the conversion of debt contracts the program quite successfully managed the transition to a much lower inflation rate while real output recovered rapidly after an initial contraction still inflationary forces remained strong the problem of achieving a sustained stabilization proved quite difficult to solve this paper briefly describes the program and its effects with some references to current debates on stabilization policies see my 1986 study for full discussion and details

the greek stabilization of 1944 46 it is a matter of great contention among economists whether economic stabilization programs can be instituted without imposing high real costs those believing in the core or underlying rate of inflation hypothesis argue that relying only on conventional monetary and fiscal policies will impose high costs the rational expectations proponents on the other hand argue that a convincing antiinflation program will likely minimize these costs as economic agents respond to a genuine regime change or change in the rules under which monetary and fiscal policies are conducted a way of discriminating between these contending views is to examine the stabilization phase of the world s episodes of hyperinflation thus far the work of thomas sargent 1982 on the post world war i experiences in austria hungary poland and germany and william bomberger and myself 1983 on post world war ii hungary have adduced evidence in support of the rationalists view price level stability was achieved rapidly without a prolonged period of high unemployment the greek stabilization of 1944 46 is not so straightforward and as such provides an interesting contrast to the other episodes its unique feature is that price level stability took over a year to achieve following the initial reform of november 11 1944 it was not achieved until in a third reform in early 1946 the greek 1018 1024

some colonial evidence on two theories of money maryland and the carolinas recent developments in monetary economics stress the nature of monetary injections emphasizing that they have implications for the relationship between money and prices in contrast traditional approaches posit stable money demand functions that are independent of how money is injected the former approach implies that certain proportionality relations between money and prices need not obtain this permits the two approaches to be empirically distinguished but only if an appropriate experiment is conducted the colonial period is one such experiment colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply

unobserved rational expectations and the german hyperinflation with endogenous money supply a kalman filtering technique is employed to test the convergent expectation hypothesis in the great german hyperinflation when the money supply is endogenously determined after converting the model structure to a state space form the parameters are estimated via minimization of a gaussian likelihood function the result is then used in a filter smoother combination to yield smoothed estimates of the state variable associated with the arbitrary constant of the rational expectations solution bo th para metric and nonparametric tests lead us to reject the null hypothesis of convergent expectations copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

terminating hyperinflation in the dismembered habsburg monarchy to assess the validity of thomas sargent s claim that hyperinflation can be terminated without dire employment effects monthly unemploymentpercentage estimates were constructed for poland hungary and austriaover the period both before and after monetary stabilization followingworld war i these data reveal that there were significant effects onemployment in the three territories unemployment peaked in poland at alittle less than 13 percent in hungary at 12 percent and probably higher and in austria at 7 percent an attempt is made to identify those considerations that contributed to the emergence of unemploymentwith the advent of monetary stabilization copyright 1986 by american economic association

inflation and currency reform expectations of currency reform are explicitly incorporated into a rational expectations version of the cagan model of money market equilibrium where expectations about the timing of reform are lerived from a simple government rule for choosing when to reform the currency the model is estimated for three of the episodes of hyperinflation that cagan investigated and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

testing for rational bubbles with exogenous or endogenous fundamentals the german hyperinflation once more abstract the presence of rational price bubbles during the german hyperinflation is tested under two different structural assumptions on the money process if the money supply is constrained to be exogenous to the current inflation rate the hypothesis of no bubble can be rejected however this is no longer found to be true when a feedback rule from inflation to money creation is allowed the analysis contradicts previous results presented in the literature

asset substitution money demand and the inflation process in brazil various domestic financial assets in brazil have provided relatively liquid nonmonetary alternatives monthly money demand estimates which include domestic asset opportunity costs and take account of t bill repurchase agreements in a dynamic error correction model demonstrate the importance of domestic substitutes in explaining money holdings money demand appears responsive and stable moreover t bills and indexed bonds have acted as an alternative to central bank liabilities as a source of finance for government deficits evidence indicates that the initial financing of government deficits through bonds bills and other nonmonetary liabilities may explain why money lags price shocks rather than vice versa copyright 1989 by ohio state university press

consequences of offshoring to developing nations labor market outcomes welfare and corrective interventions our parsimonious two country developed country and developing country model of offshoring provides nuanced results these include cases where wages monotonically improve as well as where wages exhibit an inverted u relationship with offshoring cost reductions we identify conditions under which these relationships hold since global welfare always rises with improvements in offshoring technology we find that there is a role for a minimum wage alternatively wage tax in the developing country we derive such a policy s optimal level there is also the possibility of a developed country optimal offshoring tax for extracting terms of trade benefits we finally analyze the two country nash equilibrium in policies jel f11 f13 f16 f66 o19 o24

government debt and inflationary expectations as determinants of the money supply in germany 1919 23 1 he growth of the money supply has figured prom1nently in every account of germany s inflation in the 1920s the very word inftation referred more to money growth than to the rise of prices in their models of inflation especially hyperinflation recent economists treat the growth of money as an immediate and often as an exogenous cause of inflation of prices inflationary expectations play an important intermediary role and what expectations process was rational depends chiefly on what process determined the money supply sargent and wallace 1973 webb 1983 pp 443 46 unfortunately economists have rarely looked beyond the numbers at what the reichsbank did and what it left undone to investigate the money supply this paper begins with a model that reflects the central bank s own understanding of its monetary policy during the inflation period the reichsbank followed a passive policy that let the size of the money stock be determined by the government and corporate demand for credit and by the private sector s choice of the mix of debt and money in its portfolios we must see how well such a model explains money growth and whether its coefficients changed signifi

returns policy new model introduction and consumer welfare abstract this paper investigates how economic outcomes differ for new model introduction between two extreme contracts outright sales contract and returns policy contract with full credit under the outright sales contract we show that the retailer s incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse the primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model