DP431 A Model of Currency Depreciation and the Debt-Inflation Spiral
|Publication Date:||July 1990|
|Keyword(s):||Currency Depreciation, Dynamic Games, Markov-Perfect Equilibrium, Public Debt, Tax-Smoothing Models|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=431|
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.