INFLATION AND THE PUBLIC DEFICIT WHEN THE UTILITY OF MONEY IS INSATIABLE*

Alejandro Rodríguez‐arana
Authors registered in the RePEc Author Service: Alejandro Rodríguez Arana

The Japanese Economic Review, 2007, vol. 58, issue 2, 238-254

Abstract: When the marginal utility of money is positive even at very high levels of the asset (Yoshiyasu Ono's, 1994, assumption), the relationship between inflation and the public deficit at full employment may result in a unique perverse equilibrium where higher deficits reduce inflation. If there are two equilibria, the low inflation equilibrium is one where the perverse effect between inflation and the public deficit prevails; while in the high inflation equilibrium higher public deficits increase inflation. These results contrast sharply with traditional results found in the literature.

Date: 2007
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