Working Paper

Hyperinflation and stabilization: Cagan revisited

Abstract: In this paper Cagan's analysis of hyperinflations is adapted to look at situations where the deficits to be financed by money creation are large and variable, but fiscal stabilisation is expected--features found in some of the republics of the Former Soviet Union soon after independence. The impact of various stabilisation policies on real balances and inflation expectations is studied, assuming expectations are rational and deficits follow a geometric Brownian motion until the stabilisation takes place. For a modified form of Cagan's demand function we are able to obtain explicit solutions using Ito's Lemma; these are calibrated to give numerical estimates of the effects of expected fiscal stabilisation.

Keywords: Europe, Eastern; Inflation (Finance);

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 1995

Number: 529