Destabilizing effects of a successful stabilization: a forward-looking explanation of the second Hungarian hyperinflation |
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Authors: | Beatrix Paal |
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Institution: | (1) Department of Economics, Cornell University, Uris Hall, Ithaca, NY 14853, USA (e-mail: bp13@cornell.edu), US |
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Abstract: | Summary. The extreme severity of the second Hungarian hyperinflation is argued to be related to the unusual way in which the inflation
was eventually stabilized. The historical features of this episode are represented in a general equilibrium model, which incorporates
a transition from one monetary regime to another. During the inflation the government finances a fixed deficit with seigniorage
revenue. After the stabilization the government budget is balanced and the central bank engages in a program of subsidized
lending to the private sector. Stabilization is achieved by targeting a low inflation rate path through adjustments in the
quantity of central bank lending. I show that under this stabilization policy (1) the dynamic equilibrium path of the economy
is indeterminate and (2) arbitrarily high pre-stabilization inflation rates are possible.
Received: November 5, 1998; revised version: November 30, 1998 |
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Keywords: | and Phrases: Stabilization Inflation targeting Rediscounting Regime change Indeterminacy Second Hungarian hyperinflation |
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