The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level

Abstract: 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.

Keywords: Inflation; Deflation; The Fiscal Theory of the Price Level; Demand for Money (search for similar items in EconPapers)
JEL-codes: E31 E41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written 2004-09-21
Note: Type of Document - pdf; pages: 44
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