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The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level

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  • Taiji Harashima

    (University of Tsukuba and Cabinet Office of Japan)

Abstract

The paper explores a fundamental mechanism of inflation by explicitly including a government's optimization problem into a general equilibrium model assuming a Leviathan government. The result is clear- cut and beautiful: inflation is caused by the difference of the time preference rates between a government and households. This is an inevitable consequence of heterogeneity in time preference rates between a government and households. The model can be seen as a unified model that explains various types of inflation, e.g. hyperinflation, chronic inflation, disinflation and deflation, by this single mechanism. The model shows that inflation has the intrinsic nature of persistence, i.e. inflation rates have a unit root.

Suggested Citation

  • Taiji Harashima, 2004. "The Ultimate Source of Inflation: A Microfoundation of the Fiscal Theory of the Price Level," Macroeconomics 0409018, University Library of Munich, Germany, revised 30 Mar 2005.
    • Handle: RePEc:wpa:wuwpma:0409018
    Note: Type of Document - pdf; pages: 44
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0409/0409018.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Harashima, Taiji, 2019. "A Theory of Inflation: The Law of Motion for Inflation under the MDC-based Procedure," MPRA Paper 113161, University Library of Munich, Germany.
    2. Harashima, Taiji, 2021. "The Root Cause of Sovereign Default," MPRA Paper 110010, University Library of Munich, Germany.
    3. Harashima, Taiji, 2020. "A Theory of the Credit-to-GDP Gap: Using Credit Gaps to Predict Financial Crises," MPRA Paper 111732, University Library of Munich, Germany.
    4. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
    5. Harashima, Taiji, 2009. "Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path," MPRA Paper 18953, University Library of Munich, Germany.
    6. Harashima, Taiji, 2015. "The Rate of Time Preference of Government," MPRA Paper 65387, University Library of Munich, Germany.
    7. Harashima, Taiji, 2007. "Why should central banks be independent?," MPRA Paper 1838, University Library of Munich, Germany, revised 19 Feb 2007.
    8. Harashima, Taiji, 2013. "Escaping a Liquidity Trap: Keynes’ Prescription Is Right But His Reasoning Is Wrong," MPRA Paper 48115, University Library of Munich, Germany.
    9. Harashima, Taiji, 2007. "Hyperinflation, disinflation, deflation, etc.: A unified and micro-founded explanation for inflation," MPRA Paper 3836, University Library of Munich, Germany.
    10. Taiji HARASHIMA, 2013. "The Phillips Curve And A Micro-Foundation Of Trend Inflation," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 4(2), pages 151-182.
    11. Taiji HARASHIMA, 2016. "A Theory Of Deflation: Can Expectations Be Influenced By A Central Bank?," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 7(2), pages 98-145.
    12. Harashima, Taiji, 2008. "A Microfounded Mechanism of Observed Substantial Inflation Persistence," MPRA Paper 10668, University Library of Munich, Germany.
    13. Harashima, Taiji, 2006. "The Sustainability of Budget Deficits in an Inflationary Economy," MPRA Paper 905, University Library of Munich, Germany.
    14. Taiji Harashima, 2005. "The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers," Macroeconomics 0510026, University Library of Munich, Germany, revised 17 Nov 2005.

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    More about this item

    Keywords

    Inflation; Deflation; The Fiscal Theory of the Price Level; Demand for Money;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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