The monetary model of hyperinflation : limits of the model validity
The Cagan monetary model of hyperinflation has a relatively simple structure and a rich set of solutions. However, the wealth of possible solutions of this model does not constitute an asset for it. The introduction of rational expectations into the model was often at the origin of these validity problems as shown in Buiter (1987) or Kiguel (1989). Then, this model has usually been associated with the adaptive expectations assumption in the literature. In the same spirit Evans (1995) stressed that the assumption of adaptive expectations is a sufficient condition to ensure its validity. This articles aims at highlighting the strict association met in the literature between the assumption of adaptive expectations and the correct running of the monetary model of hyperinflation. A complete resolution of the model under the assumption of adaptive expectations is carried out. This approach completes the analyses made in Bruno & Fisher (1987, 1990), taken up again in Blanchard and Fischer (1990) and still recently in Walsh (2003). The aim is to show that the way inflationary expectations are formed is not crucial for the validity of the model. Rather crucial is the adjustment lag of real cash balances to their desired level
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.