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Revisiting speculative hyperinflations in monetary models.

Maurice Obstfeld1, Kenneth Rogoff2

  • 1University of California, Berkeley, United States of America.

Review of Economic Dynamics
|September 9, 2020
PubMed
Summary
This summary is machine-generated.

Speculative hyperinflations in monetary models are explored. Even with constant money supply, pure fiat systems risk zero value, but minimal currency backing prevents this, contrary to some analyses.

Keywords:
Asset bubblesFiscal theory of the price levelGovernment budget constraintHyperinflationMoney demand

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Area of Science:

  • Monetary Economics
  • Macroeconomics
  • Economic Theory

Background:

  • The debate on ruling out speculative hyperinflations in monetary models is revisited.
  • Understanding extreme economies offers insights into price level determination.
  • The relevance to claims made by advocates of the fiscal theory of the price level is assessed.

Purpose of the Study:

  • To re-examine the conditions under which speculative hyperinflations can be ruled out in monetary models.
  • To evaluate the role of fiscal backing in preventing monetary collapse.
  • To address critiques of previous findings regarding currency backing and hyperinflation.

Main Methods:

  • Analysis of pure fiat money models with rational expectations.
  • Examination of models with exogenous and constant money supply.
  • Comparison of money-in-the-utility-function and overlapping-generations models.
  • Critique of alternative analyses concerning monetary fragility.

Main Results:

  • In pure fiat models, speculative hyperinflations (zero money value) cannot be reasonably ruled out, even with a constant money supply.
  • Even minimal real backing of currency by the government, acting as a backstop, can rule out such perverse equilibria.
  • Critiques suggesting fractional currency backing is insufficient are addressed by showing they involve subtle model specification changes that introduce monetary fragility.

Conclusions:

  • The presence of even a small fiscal backstop is crucial for preventing speculative hyperinflations in monetary models.
  • The analysis highlights the importance of model specification in determining monetary stability.
  • The findings have implications for the fiscal theory of the price level and understanding extreme monetary phenomena.