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Crisis, Stabilization, and Economic ReformTherapy by Consensus$
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Michael Bruno

Print publication date: 1993

Print ISBN-13: 9780198286639

Published to Oxford Scholarship Online: September 2006

DOI: 10.1093/0198286635.001.0001

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Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation

Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation

Chapter:
(p.42) 3 Shocks and Accommodation: The Dichotomy and Mechanics of High Inflation
Source:
Crisis, Stabilization, and Economic Reform
Author(s):

Michael Bruno

Publisher:
Oxford University Press
DOI:10.1093/0198286635.003.0003

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

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