Hyperinflation and Stabilisation: Cagan Revisited

Marcus Miller and Lei Zhang ()

Economic Journal, 1997, vol. 107, issue 441, 441-54

Abstract: Using a variant of the Cagan (1956) model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Alan Drazen and Elhanan Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semielasticity of demand for money to provide estimates of the maximum viable real deficit. Copyright 1997 by Royal Economic Society.

Date: 1997
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Related works:
Working Paper: Hyperinflation and Stabilization: Cagan Revisited (1996)
Working Paper: Hyperinflation and stabilization: Cagan revisited (1995)
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