Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation

Michael Bruno

in Crisis, Stabilization, and Economic Reform

Published in print August 1993 | ISBN: 9780198286639
Published online September 2006 | e-ISBN: 9780191603839 | DOI:

Series: Clarendon Lectures in Economics

 Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation

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This chapter examines the dynamics of high inflation under accommodation to price shocks. One simple approach to the budget as a source of the inflationary process is to consider the link of the form of finance, namely seigniorage revenue and the average rate of inflation, on the hypothetical assumption that one is observing fluctuations around steady states. This gives at least some lead on the possible long-run relationship between the monetization of deficits and the rate of inflation. A closer historical look at the changing trade-off between inflation, real GDP growth, and the current account leads to the detailed dynamics of the inflationary process without which the ‘shocks and accommodation’ nature of the process cannot be understood. Part of the reason for the progressive acceleration of inflation will be found in the connection between the budget deficit and the balance-of-payments deficit, and the government response in the form of devaluations and subsidy cuts.

Keywords: price shock; seigniorage revenue; budget; finance; deficit; Israel

Chapter.  13498 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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