Abstract
The typical models that try to explain hyperinflation contain three basic ingredients: (1) the portfolio allocation decision with the specification of a money demand equation in which the expected inflation rate is a key argument; (2) a mechanism that describes the expectations formation; and (3) an equation representing the government deficit financing through money issuing. Cagan (1956) took into account the first two ingredients, but considered money as exogenous, while Kalecki (1962) hyperinflation model contained the three ingredients. The current economic literature follows this theoretical framework and has several contributions that analyze the properties of the hyperinflation models. Evans and Yarrow (1981) and Buiter (1987), among others, state that rational models are unable to produce hyperinflationary processes, although they are able to generate hyperdeflationary processes. Kiguel (1989) based on the hypothesis that prices and wages are not flexible, introduced in his model the assumption that the money market does not adjust instantaneously, but according to a partial adjustment mechanism. Having this additional hypothesis, the model with rational expectations is able to generate hyperinflationary processes to some values of the structural parameters of the model.
(with Waldyr Muniz Oliva and Elvia Mureb Sallum)
This is an edited version of a paper originally published in Revista de Economia Política vol 13 (January/March 1993), pp. 5–24 (Barbosa et al. 1993).
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Notes
- 1.
The Phillips curve is backward looking since inflation depends on past inflation according to: π(t) = π(t −τ) +κ x, where τ is the time lag. We use a first order Taylor expansion to get rid of the unknown lagged inflation: \(\pi (t-\tau ) =\pi (t) +\dot{\pi } (t)(t -\tau -t)\). By combining these two expressions we obtain: \(\dot{\pi }=\delta x,\delta =\kappa /\tau\). When τ → 0, δ → ∞.
- 2.
Let us assume that the IS curve, the LM curve and the Fisher equation are given by: IS, \(x = -\alpha (r -\bar{ r})\), LM, \(\log m/\bar{m} =\phi x -\eta (i -\bar{ i})\), Fisher equation, \(i = r+\pi,\bar{i} =\bar{ r}+\bar{\pi }\). By using these four equations we obtain (3.8), with \(a =\alpha (\log \bar{m}-\eta \bar{\pi })/(\eta +\phi \alpha )\); b = α∕(η +ϕ α); c = η α∕(η +ϕ α). The coefficient b measures the Keynes effect and the coefficient c measures the Fisher effect.
- 3.
Hopf bifurcation theory requires the computation of the third order derivative of a function and its sign according to Marsden and McCraken (1976, p. 65). This computation was carried out and the sign of this derivative is negative.
- 4.
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Barbosa, F.d. (2017). Chronic Inflation and Hyperinflation. In: Exploring the Mechanics of Chronic Inflation and Hyperinflation. SpringerBriefs in Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-44512-0_3
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