interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

a note on bargaining and inflation abstract the purpose of this note is to illustrate how the impact of anticipated inflation on relative prices is a straightforward implication of a well known model of exchange rubinstein game of non cooperative bargaining between completely informed traders the game owes its interest to the very nature of the inflationary process since the economy s nominal values progressively increase the buyer is faced with the future competition of younger buyers who will hold larger amounts of nominal balances these future richer customers provide the seller with an outside option that alters in his favor the equilibrium of the game the relative price of the good rises with inflation

buying less but shopping more the use of nonmarket labor during a crisis households allocating time between market and non market uses should respond to income variations by adjusting the time devoted to shopping search and other home production activities in this paper we exploit high frequency household expenditure data to examine the use of changes in shopping intensity as a method of mitigating the effects of the 2002 argentine economic crisis although the total quantity and real value of goods purchased fell during the crisis consumers are found to be doing more shopping search this increase in shopping is shown to enable households to seek out lower prices and locate substitutes allowing a given level of expenditure to buy more goods the magnitude and prevalence of these effects suggest that this non market use of labor can be an important coping strategy for households during a recession

nominal and real disturbances and money demand in chinese hyperinflation this paper reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors the theory generates empirically testable implications that suggest expanding the standard caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion employing data from the post world war ii chinese hyperinflationary episode the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and hence underestimate the welfare costs of hyperinflation

a model of currency depreciation and the debt inflation spiral abstract this paper shows how a government that cannot make credible policy commitments might manage its exchange rate and fiscal stance in a world of rational expectations the dynamic game model developed here potentially can generate diverse patterns of macroeconomic behavior patterns that differ as a result of assumed differences in government objectives under some types of government the ongoing strategic interaction between the public and private sectors leads to a disinflationary outcome other governments may push the economy into a spiral of rising debt and inflation

on high inflation and the allocation of resources abstract this paper formalizes some of the disruptive effects of inflation on the organization of markets rapid inflation induces buyers to speed up purchases which thus inhibits the selection of more adequate trading partners through search this blurs distinctions across firms of different productivities and leads to resource misallocations as inflation causes efficient and inefficient firms to be less distinguishable the incentives to engage in cost reduction are dampened and lower growth results the model could provide a rationale for the large number of bankruptcies and large turnover rates following successful inflation stabilization programs like those of israel bolivia and argentina

import demand with rational expectations estimates for bauxite cocoa coffee and petroleum abstrac t we offer a method for establishing the distributed lag structure in import demand models a priori we consider a firm which imports raw materials in a world of uncertainty traditional considerations of adjustment and inventory holding costs lead to a forward looking import decision rule linear rational expectations modelling allows us to transform the forward looking rule into a finite distributed lag specification while the resulting model is similar in form to earlier empirical models it is not subject to the lucas critique the model is fitted to u s data over the period 1954 1980

principles of fiscal and monetary policy abstract this paper describes a complete and internally consistent set of principles for the conduct of a welfare maximizing fiscal and monetary policy issues of time consistency that arise in applying these principles to actual economics are also discussed

liquidity dynamics and cross autocorrelations this paper examines the relation between information transmission and cross autocorrelations we present a simple model where informed trading is transmitted from large to small stocks with a lag in equilibrium large stock illiquidity induced by informed trading portends stronger cross autocorrelations empirically we find that the lead lag relation increases with lagged large stock illiquidity further the lead from large stock order flows to small stock returns is stronger when large stock spreads are higher in addition this lead lag relation is stronger before macro announcements when information based trading is more likely and weaker afterward when information asymmetries are lower

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

precise and efficient computation of the beveridge nelson decomposition of economic time series abstract this note shows how the beveridge nelson decomposition of economic time series can be precisely computed without the necessity for truncating infinite sums the algorithm includes those of beveridge and nelson 1981 and miller 1988 as special cases for particular models correcting an error in the latter

the impact of the correlation between health expenditure and survival probability on the demand for insurance abstract this paper studies the effects of health shocks on the demand for health insurance and annuities along with precautionary saving in a dynamic life cycle model i argue that when the health shock can simultaneously increase health expenses and reduce longevity rational agents would neither fully insure their uncertain health expenses nor fully annuitize their wealth because the correlation between health expenses and longevity provides a self insurance channel for both uncertainties that is when the agent is hit by a health shock which simultaneously increases health expenses and reduces longevity she can use the resources originally saved for consumption in the reduced period of life to pay for the increased health expenses since the two uncertainties partially offset each other the precautionary saving generated in the model should be smaller than in a standard model without the correlation between health expenses and longevity in a quantitative life cycle model calibrated using the medical expenditure panel survey dataset i find that the health expenses are highly correlated with the survival probabilities and this correlation significantly reduces the demand for actuarially fair health insurance while its impact on the demand for annuities and precautionary saving is relatively small

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

price and income elasticities of disaggregated import demand results from uecms and an application this paper presents an empirical analysis of the demand for maize milk powder butter and rice imports in cyprus using annual time series data covering the period 1975 1994 none of these products is produced in cyprus and all the necessary quantities are imported to meet domestic demand the primary objective of the paper is to derive long run price and income elasticities of import demand that can be used to analyse the impact of various policies such as the adoption of the common agricultural policy cap when and if the republic of cyprus joins the european union eu in so doing the paper takes on board some recent developments in time series econometrics the cointegration test used the bounds test is a recent test and is based on the estimation of an unrestricted error correction model uecm parsimonious models were derived using hendry s general to specific approach the estimated elasticities were subsequently used to quantify some of the implications for cyprus had the cap been ope

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

bargaining search costs and equilibrium price distributions this paper studies a bargaining model of equilibrium price distributions consumers choose a seller at random and face search costs to switching to another store in the market equilibrium the prices at all stores are determined simultaneously as the perfect equilibrium of a bargaining game in this game the buyer has the outside option to search for another seller differences between the sellers types create price dispersions typically the number of active sellers increases with higher search costs the market equilibrium converges to the competitive equilibrium under perfect information when search costs become small

economic exchange during hyperinflation historical evidence indicates that hyperinflations can disrupt individuals normal trading patterns and impede the orderly functioning of markets to explore these issues we construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange in our model buyers must carry cash while shopping and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good since buyers face the constant threat of incoming younger hence richer customers their bargaining position is weakened by inflation allowing sellers to extract a higher real price however we show that higher inflation also reduces buyers search increasing sellers wait for customers as a result the volume of transactions concluded in the decentralized sector falls at high enough rates of inflation all agents suffer a welfare loss

covered interest arbitrage profits the role of liquidity and credit risk we study the profitability of covered interest parity cip arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick by tick firm quotes for all financial instruments involved in the arbitrage strategy the empirical analysis shows that positive cip arbitrage deviations include a compensation for liquidity and credit risk once these risk premia are taken into account small arbitrage profits only accrue to traders who are able to negotiate low trading costs the results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy

comment on search bargaining mc ney and prices some recent results and policy implications when bill gavin invited me to discuss the trejos wright paper hereafter tw i decided to read the august 1991 issue of the journal of money credit and banking in which the previous conference on price stability was published since my own research is on the consequences of high inflation i found that volume to be extremely interesting although i liked most of the papers the real gems were the comments one of my favorites is the comment by stephen cecchetti to the imrohorogluprescott paper seigniorage as a tax where he concludes that the paper has virtually nothing to do with any costs caused by inflation in the real world i want to use that reflection as the starting point of my comment wherein i make essentially two points first i believe that the tw paper has a lot to do with the costs caused by inflation in the real world that is this is one very appropriate framework to study some of the main consequences of inflation and second since the authors have not yet done so i want to suggest ways in which we can use their framework to study the consequences of inflation and inflation uncertainty i address these two points in the next two sections

testing dynamic specification for import demand models the case of cotton error correction models impose few prior restrictions on dynamic model specification and allow the data to determine model structure despite this obvious advantage few applications have adopted the error correction model to explain trade flows an error correction model of cotton import demand is estimated for france japan and hongkong a variety of tests are applied to determine the dynamic structure of the model it is found that the most general models are those that best fit the data for cotton import demand long run elasticities from these general models are significantly different than elasticities derived from a comparable static model

u s stock market crash risk 1926 2010 abstract this paper examines how well alternate time changed levy processes capture stochastic volatility and the substantial outliers observed in u s stock market returns over the past 85 years the autocorrelation of daily stock market returns varies substantially over time necessitating an additional state variable when analyzing historical data i estimate various one and two factor stochastic volatility levy models with time varying autocorrelation via extensions of the bates 2006 methodology that provide filtered daily estimates of volatility and autocorrelation the paper explores option pricing implications including for the volatility index vix during the recent financial crisis

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

international currency substitution and seigniorage in a simple model of money i introduction currency substitution describes the change in the holdings of domestic and foreign real balances in response to fluctuations in the relative prices of these currencies so far the empirical evidence on the strength of currency substitution has been mixed miles 1978 finds evidence in favor of strong currency substitution between the canadian dollar and the u s dollar bordo and choudhri 1982 criticize miles on the ground that miles has a misspecified model and their estimates of a canadian money demand function indicate little currency substitution in a recent paper rogers 1992 finds that dollarization in a high inflation economy such as mexico s is quite strong and statistically significant imrohoroglu 1994 on the other hand estimates the extent of currency substitution between the canadian dollar and the u s dollar using a gmm approach and finds that the elasticity of currency substitution in canada is quite low between 0 29 and 0 43 depending on the instruments used furthermore the estimate of the share of u s dollar denominated deposits in producing canadian liquidity services is on the order of 1 percent to 3 percent the policy implications of currency substitution have been extensively analyzed most of these studies concentrate on the impact of currency substitution on the volatility of exchange rates and the autonomy of domestic monetary policy under a flexible exchange rate regime 1 recently researchers have started to explore whether currency substitution alters the results in the optimal inflation tax literature for example vegh 1989 shows that it may be optimal to resort to the inflation tax under currency substitution since it reduces the distortion introduced by an exogenously given positive foreign interest rate in his model a positive foreign interest rate creates a distortion because it acts as an indirect consumption tax kimbrough 1991 analyzes a small open economy under currency substitution where domestic agents are required to use domestic real balances to purchase the domestic nontraded good foreign real balances to purchase the imported good and either domestic or foreign real balances to purchase the exportable good he finds that it is optimal to follow the friedman rule of a zero nominal interest rate in this setup since money serves as an intermediate good guidotti and vegh 1993 however argue that kimbrough s 1991 result only applies under very restrictive assumptions on the transactions technology and that in general the optimal inflation rate is positive under currency substitution aizenman 1992 considers a multi country money in the utility function model in a common currency area where there are collection costs associated with income taxation he shows that in the absence of a cartel agreement on how to share the seigniorage revenue the optimal inflation rate for individual countries will exceed the optimal inflation rate under a cooperative solution canzoneri and diba 1992 study the role of currency substitution in a two country money in the utility function model under a flexible exchange rate regime where there are collection costs of lump sum taxes they show that the outcome of a noncooperative seigniorage maximization or welfare maximization game is characterized by the friedman rule the cooperative outcome on the other hand includes the inflation tax as part of an optimal tax package since lump sum taxes are costly to collect the theoretical literature summarized above suggests that currency substitution may have important economic implications most of the attention has been on the role of the elasticity of currency substitution the share of foreign real balances in the residents domestic portfolio has largely been ignored laney radcliffe and willett 1984 and joines 1985 emphasize the distinction between the elasticity of substitution and the cross elasticity of money demand and argue that a high cross elasticity is necessary for currency substitution to have a major destabilizing impact on domestic money demand

adjustment costs and import demand behavior evidence from canada and the united states abstract in this paper we examine whether adjustment costs are a significant source of the observed sluggish adjustment of canadian and us import demand we use a simple model of a utility maximizing domestic consumer under the assumption of integrated forcing variables to examine the importance of adjustment costs this formulation of the problem allows us to exploit the recently developed theory of cointegration to estimate the structural parameters of the model using a two step methodology moreover the formulation incorporates an element of forward looking behaviour into the decision process a feature that is important if one assumes adjustment costs are a significant source of persistence in import demand adjustment the empirical results from a euler equation imply that adjustment costs in canada and the united states are important

distributed lags and intermediate good imports abstract in this paper we draw upon some recent developments in the theory of dynamic economics and econometrics to characterize the time series behavior of intermediate good imports it is shown that adjustment costs delivery lags and inventory holding costs considerations lead to distributed lag import demand functions that are not subject to the nerlove 1972 and lucas 1976 critiques of ad hoc and fixed distributed lag modelling

measuring true stock index value in the presence of infrequent trading based on the beveridge nelson 1981 decomposition of an arima process i present a measure of true stock index value that is not directly observable due to infrequent trading of stocks the technique is illustrated with daily observations of the russell 2000 index this new measure might well prove useful in studies of lead lag relationships between index derivatives and spot market and futures basis measurements

price dispersion inflation and welfare we examine the implications of inflation for both price dispersion and welfare in a monetary search economy in our economy if the degree of buyers incomplete information about prices is fixed both price dispersion and real prices are increasing in inflation as the inflation rate approaches the friedman rule both price dispersion and welfare losses vanish if households choose the number of prices to observe then the optimal inflation rate may exceed the friedman rule as inflation induces search and up to a point raises welfare by eroding market power

money demand and the relative price of capital goods in hyperinflations abstract we investigate dynamic interactions between relative price movements and money demand behaviors during hyperinflations viewing relative price changes as resulting primarily from real disturbances we develop a general equilibrium model with heterogeneous consumption and capital goods to illustrate how monetary shocks may produce real effects through the relative price channel this motivates the design of long run restrictions to identify a structural vector autoregression employing data from the post wwi germany and the post wwii chinese hyperinflationary episodes the empirical results support the contention that both real and nominal shocks have important effects on the relative price and money demand during hyperinflations

bilateral trade elasticities this paper estimates income and price elasticities for bilateral world trade in addition to testing the properties of the error terms the dynamic specification and the assumption of parameter constancy the analysis presents the first application of the bank spectrum estimator to bilateral trade flows for all countries the paper finds that bilateral trade elasticities exhibit enough of a dispersion to suggest that the direction of trade is sensitive to changes in income and prices using the bilateral elasticities as raw data the analysis obtains the associated multilateral estimates and finds that they are both consistent with the literature and suitable to addressing questions involving multilateral trade but the evidence also reveals that sole reliance on multilateral elasticities conceals valuable information for both policy applications and empirical analyses of international trade copyright 1990 by mit press

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

order imbalances and stock price movements on october 19 and 20 1987 on october 19 1987 nyse stocks in the s p index declined seven percentage points more than nyse stocks not in this index in the first hour of trading on october 20 the s p stocks virtually recovered to the level of the non s p stocks there is a strong relation between order imbalances and stock price movements both in analyses of time series and cross sections thus in addition to the breakdown in the linkage between future prices and the spot index on these two days there were also breakdowns in the linkage among nyse stocks

mean reversion of standard poor s 500 index basis changes arbitrage induced or statistical illusion mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers we propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion arising because many stocks in the index portfolio trade infrequently even without formal arbitrage reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated the implications of this study go beyond index arbitrage however our analysis suggests that spurious elements may creep in whenever the price change or return series of two securities or portfolios of securities are differenced mean reversion in stock index basis changes has been amply documented mackinlay and ramaswamy 1988 find significant negative first order autocorrelation in normalized intraday basis changes of the s p 500 index futures traded on the chicago mercantile exchange cme yadav and pope 1990 find similar behavior using financial times stock exchange ftse 100 index futures data from the london international financial futures exchange liffe as does lim 1990 using nikkei 225 index futures from the singapore international monetary exchange simex the trading activity of stock index arbitragers has been presumed to be driving this elastic realignment of stock index and index futures prices when the basis widens beyond its theoretical level arbitragers simultaneously sell index futures and buy the index portfolio pulling the difference between the futures and index

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

liquidity and the law of one price the case of the futures cash basis deviations from no arbitrage relations should be related to market liquidity because liquidity facilitates arbitrage at the same time a wide futures cash basis may trigger arbitrage trades and in turn affect liquidity we test these ideas by studying the dynamic relation between stock market liquidity and the index futures basis there is evidence of two way granger causality between the short term absolute basis and liquidity and liquidity granger causes longer term absolute bases shocks to the absolute basis predict future stock market liquidity the evidence suggests that liquidity enhances the efficiency of the futures cash pricing system copyright 2007 by the american finance association

cagan s model of hyperinflation under rational expectations this paper studies p cagan s model of the german hyperinflation under the hypothesis that adaptive expectations are rational it shows that inference about the key money demand elasticity parameter a is very senstitive to the specification of the dynamic interaction of the unobserved money demand shock with prices and money in particular if t j sargent s 1977 specification is modified then his basic conclusions are overturned identification of a does not require prior knowledge about the covariance of unobserved shock terms and d ata on the german hyperinflation imply a sharp not loose estimate of a which is of plausible magnitude finally informal tests indicate that modifying sargent s specification gives rise to improved model fit copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a simple general equilibrium version of the baumol tobin model this paper presents a simple general equilibrium model that includes optimizing choices of the frequency of trips to the bank the model is used to analyze the effect of inflation on the capital stock the interest elasticity of money demand the optimum quantity of money and the welfare costs of inflationary finance

financial markets and inflation under imperfect information abstract this paper studies the effects of inflation on the operation of financial markets and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises this point is illustrated by presenting a simple model where inflation affects firms productivity in particular productivity differentials narrow as inflation increases this effect creates incentives for risky and less productive firms to behave as high productivity firms at high rates of inflation this may result in financial intermediaries being unable to differentiate among customers

hyperinflation the exchange rate and endogenous money post world war i germany revisited abstract we re examine the interaction of domestic and external factors in the german hyperinflation by extending frenkel s monetary model of the exchange rate to incorporate 1 endogeneity of the money supply with respect to government debt expected inflation and money wages 2 the direct impact of exchange rate depreciation on the domestic price level and 3 endogenous wage determination four equation estimates support each extension of the monetary model it appears that government deficit finance the collapse of the exchange rate and the monetary transmission of the wage price spiral were all crucial contributors to the price explosion

inflation and efficiency in a search economy we present a model in which purely monetary inflation systematically affects efficiency welfare and relative prices the model focuses on the microeconomics of trade in search markets under inflation inflation by increasing the cost of holding money undermines the market s ability to sustain long term customer relationships because those relationships generate the most efficient transactions patterns overall welfare unambiguously declines