NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rational Inflationary Bubbles

Behzad T. Diba, Herschel I. Grossman

NBER Working Paper No. 2004 (Also Reprint No. r1034)
Issued in September 1988
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w2004

Published: Diba, Behzad T. and Herschel I. Grossman. "Rational Inflationary Bubbles," Journal of Monetary Economics, Vol. 21, No. 1, pp. 35-46, (January 1988). citation courtesy of

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