ifdp · October 31, 1995

Hyperinflation and Stabilisation: 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.

Abstract In this paper Cagan's analysis of hyperinflations is adapted to look at sit uations 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.

Cite this document
APA
Marcus Miller and Lei Zhang (1995). Hyperinflation and Stabilisation: Cagan Revisited (IFDP 1995-529). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1995-529
BibTeX
@techreport{wtfs_ifdp_1995_529,
  author = {Marcus Miller and Lei Zhang},
  title = {Hyperinflation and Stabilisation: Cagan Revisited},
  type = {International Finance Discussion Papers},
  number = {1995-529},
  institution = {Board of Governors of the Federal Reserve System},
  year = {1995},
  url = {https://whenthefedspeaks.com/doc/ifdp_1995-529},
  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.},
}