Interactions between inflation, monetary and fiscal policy
In Chapter 1 I develop a simple model, that builds upon some previous work on financial innovation processes, to account for the main stylized facts observed during extreme hyperinflations. The modeling device used here helps to reconcile some conflicting views on the causes, development and end of a hyperinflation without departing from the rational expectations assumption. Specifically, it is shown that the effectiveness of a future orthodox reform to preclude the occurrence of a hyperinflation, either speculative or fundamental, is an endogenous outcome which depends on a wide array of policy choices (fiscal and monetary) and structural features of the economy. In Chapter 2 I examine the postulates of the Fiscal Theory of the Price Level (FTPL) under an interest rate peg. I show that the usual definition of a non-Ricardian plan involves a non-credible government policy commitment, thus confuting the interpretation of the FTPL as a policy-based equilibrium selection device. Then I identify the set of necessary conditions for the implementation of non-Ricardian fiscal plans that result in a unique equilibrium. A critical necessary condition for the credibility of a fiscalist plan is that the equilibrium level of seigniorage must be non-positive. I argue that the fiscalist stock-analogy is only meaningful, precisely, when money enters into the government constraint as a destination of funds, rather than as a source. In Chapter 3, I extend Buiter's (2001, 2002) criticism (non-Ricardian plans are generally non-implementable whenever the monetary authority sets a non-contingent sequence of money supplies) to an infinite horizon economy. In particular, it is shown that a fiscalist deflation involves the violation of a household's optimality condition and that the notion of a fiscally-induced speculative hyperinflation cannot be rationalized invoking a symmetry between the problem of pricing a potentially fiat non-convertible asset (like money) and that of pricing the stock of a private firm as advocated by the FTPL.