On the theory of inflation in open economies
Creators: name: Kingston, Geoffrey
Publisher: name: The Australian National University
Year: 1978
Subjects: subject: Inflation (Finance) Mathematical models

description: The theoretical literature provides straightforward answers to questions of the general form: what are the long-run effects on inflation at home and abroad of a sustained increase in monetary growth at home? It is less informative, however, about questions of the kind: what are the long-run effects on monetary growth and inflation at home and abroad of a sustained increase in the gap between public purchases of home output and net explicit taxes on home incomes? Building on the work of Cagan (1956), Christ (1968), Turnovsky (1977) and others, this dissertation addresses the latter type of question. Various other short-run and long-run effects of expansionary public policy are also considered. Finally, stability, and (less frequently) existence and uniqueness properties are investigated. For these purposes, a static Keynes-Phillips model is embedded in a dynamic model of the creation of public debt, the formation of CPI and exchange-rate expectations, and movements in the terms of trade; the main analytical novelty being full accounting for the effects of inflation, interest and growth on the budget constraints of the public and private sectors. Note, however, that the foregoing static and dynamic elements are invoked selectively, depending on considerations of simplicity, the particular problem at hand, and the relevant time horizon (cf. Henderson (1977)). The notion of a hierarchy of successively longer time spans is the central organizing principle of the analysis. Four different time horizons are considered. In the shortest run, investigated in Chapters III and IV, real intensive output is predetermined. Results in this setting include a variable-inflation analogue of the Dornbusch (1976c) result on exchangerate overshoot. Over the next horizon, output is demand-determined and inflation expectations are predetermined. One exercise suggested by this framework is a synthesis of repercussion-multiplier and Phillips-Curve notions; see Chapter IV. In the longer-run analyses, output is fixed at capacity and expectations are realized. An "inter-run" variant assumes further that national public sectors are able to hold down nominal rates of interest, and/or that external accounts are in a state of "quasi equilibrium" (cf. Mundell (1968)). It is then shown, for example, that the effect on a small country's disposable income of an increase In public spending on the home good is glven by the inverse of the standard Marshall-Lerner expression; see Chapters II and III. In the longest run, nominal rates of interest fully reflect the Fisher effect, and external accounts are in full equilibrium. It is shown that over such a time span, the implementation of a constant monetary growth rule would have to be accompanied by an "accommodating" fiscal policy; see Chapter IV. On the other hand, suppose that monetary growth is endogenous In every country, and reconsider the problem posed at the outset. Then: (1) the domestic and foreign inflationary effects of an increased budget deficit at home are independent of relative economic size; (2) either in a "reserve-currency" country, or in any country under flexible rates, the disturbance in question will induce a more than proportional increase in domestic monetary growth; (3) rates of monetary growth abroad will rise pari passu or remain unchanged according as whether the domestic economy is a reserve-currency country or under flexible rates; (4) higher budget deficits in "peripheraV' countries will not affect monetary growth anywhere. These and other fiscal analogues of more-familiar propositions concerning the international transmission of monetary disturbances are established in Chapter IV.