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Revisiting speculative hyperinflations in monetary models()

This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Although apparently a narrow issue, studying these extreme economies turns out to be quite illuminating in understanding the fundamentals of price level determination. It is also relevant in evaluating the b...

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Autores principales: Obstfeld, Maurice, Rogoff, Kenneth
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Elsevier Inc. 2021
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7462661/
https://www.ncbi.nlm.nih.gov/pubmed/32905039
http://dx.doi.org/10.1016/j.red.2020.08.004
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author Obstfeld, Maurice
Rogoff, Kenneth
author_facet Obstfeld, Maurice
Rogoff, Kenneth
author_sort Obstfeld, Maurice
collection PubMed
description This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Although apparently a narrow issue, studying these extreme economies turns out to be quite illuminating in understanding the fundamentals of price level determination. It is also relevant in evaluating the broader claims that advocates of the fiscal theory of the price level have made. In Obstfeld and Rogoff (1983, 1986) we show that in pure fiat money models with rational expectations, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency – a fiscal mechanism, but one that comes into play only as a backstop. Indeed that backing does not have to be certain. Cochrane (2011, 2019), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. We show here why, in fact, his analysis involves a subtle change in model specification that adds a distinct monetary fragility to our model. Our baseline analysis uses a canonical money-in-the-utility-function setup due to Brock (1974, 1975), but following Wallace (1981), we show the same results go through in an overlapping-generations model of money.
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spelling pubmed-74626612020-09-02 Revisiting speculative hyperinflations in monetary models() Obstfeld, Maurice Rogoff, Kenneth Rev Econ Dyn Article This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Although apparently a narrow issue, studying these extreme economies turns out to be quite illuminating in understanding the fundamentals of price level determination. It is also relevant in evaluating the broader claims that advocates of the fiscal theory of the price level have made. In Obstfeld and Rogoff (1983, 1986) we show that in pure fiat money models with rational expectations, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency – a fiscal mechanism, but one that comes into play only as a backstop. Indeed that backing does not have to be certain. Cochrane (2011, 2019), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. We show here why, in fact, his analysis involves a subtle change in model specification that adds a distinct monetary fragility to our model. Our baseline analysis uses a canonical money-in-the-utility-function setup due to Brock (1974, 1975), but following Wallace (1981), we show the same results go through in an overlapping-generations model of money. Elsevier Inc. 2021-04 2020-09-01 /pmc/articles/PMC7462661/ /pubmed/32905039 http://dx.doi.org/10.1016/j.red.2020.08.004 Text en © 2020 Elsevier Inc. All rights reserved. Since January 2020 Elsevier has created a COVID-19 resource centre with free information in English and Mandarin on the novel coronavirus COVID-19. The COVID-19 resource centre is hosted on Elsevier Connect, the company's public news and information website. Elsevier hereby grants permission to make all its COVID-19-related research that is available on the COVID-19 resource centre - including this research content - immediately available in PubMed Central and other publicly funded repositories, such as the WHO COVID database with rights for unrestricted research re-use and analyses in any form or by any means with acknowledgement of the original source. These permissions are granted for free by Elsevier for as long as the COVID-19 resource centre remains active.
spellingShingle Article
Obstfeld, Maurice
Rogoff, Kenneth
Revisiting speculative hyperinflations in monetary models()
title Revisiting speculative hyperinflations in monetary models()
title_full Revisiting speculative hyperinflations in monetary models()
title_fullStr Revisiting speculative hyperinflations in monetary models()
title_full_unstemmed Revisiting speculative hyperinflations in monetary models()
title_short Revisiting speculative hyperinflations in monetary models()
title_sort revisiting speculative hyperinflations in monetary models()
topic Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7462661/
https://www.ncbi.nlm.nih.gov/pubmed/32905039
http://dx.doi.org/10.1016/j.red.2020.08.004
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