The professor of EPGE - Brazilian School of Economics and Finance of FGV, Fernando de Holanda Barbosa, has just released his new book. "Exploring the Mechanics of Chronic Inflation and Hyperinflation", by Springer. This book presents a theoretical framework to explain chronic inflation and hyperinflation.
The professor's study explains that the roots of these two phenomena are a fiscal monetary regime in which currency issues finance the public deficit. Chronic inflation is modeled using the traditional and the new Keynesian model, with a different policy rule. Instead of using the Taylor rule, the Central Bank policy rule states that the currency is issued to finance the government deficit. The models of chronic inflation take into account the fact that the indexation mechanisms adjust prices and wages, producing the inertial component of inflation.
The work also explains that the dynamics of these models can be very unstable under changes of parameters or shocks that affect the economy. Previous models of hyperinflation try to explain it as a bubble phenomenon because they assume a constant real money-financed deficit. There is also an analysis of this phenomenon from the perspective of a fiscal crisis, characterized by a growing fiscal deficit. This fiscal crisis produces an intertemporal budget constraint that is not sustainable.
Finally, the book analyzes the pathology of hyperinflation, which uses the same instruments used to understand the pathologies of public debt and external debt crises. The hyperinflation model allows a taxonomy of hyperinflation, namely, bubble, weak and strong, which can be tested with the income tax curve of inflation.
Click here for more information about the book.