Working Paper: NBER ID: w4578
Authors: Laurence Ball
Abstract: This paper presents a model of a high-inflation economy. The model includes the government budget constraint and money demand equation of Cagan's 1956 model; an accelerationist Phillips curve that captures inflation inertia; and an aggregate-spending equation that accounts for the effects of the inflation tax. The paper derives the dynamic effects of fiscal policy, incomes policies, and supply shocks, and uses the results to interpret high-inflation episodes of the 1970s and 1980s.
Keywords: high inflation; fiscal policy; inflation inertia; aggregate spending; economic stabilization
JEL Codes: E31; E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending (H59) | inflation dynamics (E31) |
| exogenous inflation jumps (E31) | inflation dynamics (E31) |
| inflation rates (E31) | real monetary balances (E49) |
| fiscal contractions + income policies (E62) | stabilize inflation (E63) |
| fiscal expansions (E62) | increases in inflation (E31) |
| cutoffs of foreign loans (F34) | increases in inflation (E31) |
| monetary accommodation of supply shocks (E52) | increases in inflation (E31) |