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Speculative hyperinflations and currency substitution

Oscar Arce ()

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 10, 1808-1823

Abstract: We propose a rational expectations framework for understanding speculative hyperinflations that end in response to 'orthodox' stabilization programs. Motivated by a strong degree of hysteresis in the stock of real balances after the end of hyperinflations, we provide a cash-and-credit model in which the money demand exhibits persistence because individuals can establish long-lasting credit relationships. We use the model to show that if hysteresis in real balances is possible then a fiscal-monetary reform that successfully stops a speculative hyperinflation may fail to prevent it. We argue that speculative hyperinflationary equilibria are consistent with some key stylized facts observed in extreme hyperinflations.

Keywords: Hyperinflation; Hysteresis; Fiscal-monetary; reform; Multiple; equilibria (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:10:p:1808-1823

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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