DP431 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, Tax-Smoothing Models |
JEL(s): | 431 |
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.