Working Paper: CEPR ID: DP1310
Authors: George W. Evans; Seppo Honkapohja; Ramon Marimon
Abstract: Inflation and financing of public expenditure by are analysed in an OLG model where the deficit is constrained to be less than a given fraction of intergenerational savings. Even if there may be multiplicity of steady-state equilibria, we show that, with such a constraint, the dynamics with adaptive learning are globally convergent to a set of equilibria satisfying a local stability condition. We allow for heterogeneity of agents' learning rules and look at the role of some basic behavioural assumptions, such as a certain degree of random e-precautionary savings and inertia on agents' updating of beliefs. We also provide experimental evidence on the effect of public expenditure constraints on the stability of equilibria.
Keywords: hyperinflation; fiscal rules; experimental evidence
JEL Codes: E42; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Heterogeneous learning (D29) | Stabilization of the economy and prevention of currency collapse (E63) |
| Introduction of a constraint on public deficits financed through seignorage (H69) | Global convergence to stable steady states (C62) |
| Heterogeneity of agents' learning rules (C73) | High steady state of inflation as a robust solution (E31) |
| Deficit fraction (H62) | Transition from high inflation to a stable low inflation solution (E31) |