Citation

Discussion Paper Details

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Full Details

Title: A Model of Currency Depreciation and the Debt-Inflation Spiral

Author(s): Maurice Obstfeld

Publication Date: July 1990

Keyword(s): Currency Depreciation, Dynamic Games, Markov-Perfect Equilibrium, Public Debt and Tax-Smoothing Models

Programme Area(s): International Macroeconomics

Abstract: This paper shows how a government that cannot make credible policy commitments might manage its exchange rate and fiscal stance in a world of rational expectations. The dynamic-game model developed here potentially can generate diverse patterns of macroeconomic behaviour, patterns that differ as a result of assumed differences in government objectives. Under some types of government, the ongoing strategic interaction between the public and private sectors leads to a disinflationary outcome. Other governments may push the economy into a spiral of rising debt and inflation.

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Bibliographic Reference

Obstfeld, M. 1990. 'A Model of Currency Depreciation and the Debt-Inflation Spiral'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=431