Revisiting Speculative Hyperinflations in Monetary Models

23 Pages Posted: 22 May 2017

See all articles by Maurice Obstfeld

Maurice Obstfeld

International Monetary Fund (IMF)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2017

Abstract

This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Obstfeld and Rogoff (1983, 1986) argue that in pure fiat money models, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency, indeed the backing does not have to be certain. Cochrane (2011), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. He goes on to claim that the fiscal theory of the price level provides a much better model of the price-level determination that avoids the multiplicity of problems that plague standard monetary models. We show here why, in fact, Cochrane's analysis is incorrect, and that the equilibrium he considers fails. Our baseline analysis uses a canonical money-in-the-utility-function setup building on Brock (1974, 1975); but following Wallace (1981), we show the same results go through in the overlapping-generations model of money. We go on to discuss why we believe that the fiscal theory of the price level simply sidesteps the problem of monetary determinacy but in no way resolves it.

Keywords: Asset bubbles, Fiscal theory of the price level, Hyperinflation, money demand

JEL Classification: E31, E41, E52, E63

Suggested Citation

Obstfeld, Maurice and Rogoff, Kenneth S., Revisiting Speculative Hyperinflations in Monetary Models (May 2017). CEPR Discussion Paper No. DP12051. Available at SSRN: https://ssrn.com/abstract=2971912

Maurice Obstfeld (Contact Author)

International Monetary Fund (IMF) ( email )

Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

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