Working Paper: NBER ID: w2004
Authors: Behzad Diba; Herschel I. Grossman
Abstract: This paper analyzes the possible inception of rational inflationary bubbles under the assumption that the empirically relevant environment precludes the existence of rational deflationary bubbles. The analysis shows that if a rational inflationary bubble exists, then it must have started on the date of initial issuance of the fiat money. Moreover, the existence of a rational inflationary bubble would imply that, prior to the initial issuance of the fiat money, agents who anticipated its introduction expected a rational inflationary bubble to occur. The analysis also shows that once a rational inflationary bubble bursts it cannot restart. The analysis, however, does not preclude the existence of a rational inflationary bubble that shrinks periodically, but never bursts. The limitations on the inception and existence of rational inflationary bubbles also apply to rational exchange-rate bubbles.
Keywords: Inflation; Bubbles; Rational Expectations
JEL Codes: E31; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial issuance of fiat money (E40) | Rational inflationary bubbles (E31) |
| Rational inflationary bubbles (E31) | Rational deflationary bubbles (E32) |
| Rational inflationary bubbles burst (E32) | Cannot restart (Y70) |
| Rational inflationary bubbles (E31) | Market outcomes (D49) |