The Dynamics of High Inflation

Laurence Ball

NBER Working Paper No. 4578
Issued in December 1993
NBER Program(s):   EFG   ME

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.

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