Economic Theory

, Volume 15, Issue 3, pp 599–630

Destabilizing effects of a successful stabilization: a forward-looking explanation of the second Hungarian hyperinflation

Authors

  • Beatrix Paal
    • Department of Economics, Cornell University, Uris Hall, Ithaca, NY 14853, USA (e-mail: bp13@cornell.edu)
Research Articles

DOI: 10.1007/s001990050314

Cite this article as:
Paal, B. Econ Theory (2000) 15: 599. doi:10.1007/s001990050314

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.

Keywords and Phrases: Stabilization, Inflation targeting, Rediscounting, Regime change, Indeterminacy, Second Hungarian hyperinflation.
JEL Classification Numbers: E31, E42, E52, N14.
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Copyright information

© Springer-Verlag Berlin Heidelberg 2000