A Model of Currency Depreciation and the Debt-Inflation Spiral

Maurice Obstfeld

No 431, CEPR Discussion Papers from Centre for Economic Policy Research

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 behaviour, 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.

Keywords: Currency Depreciation; Dynamic Games; Markov-Perfect Equilibrium; Public Debt; Tax-Smoothing Models (search for similar items in EconPapers)
Date: 1990-07
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Journal Article: A model of currency depreciation and the debt-inflation spiral (1991)
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