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Corresponding Author:
Elena Seghezza, Department of Political Science, University of Genoa, Italy

The Cagan's Model, its Developments, and the Patinkin Effect

Volume 75 - Issue 4 - Papers in memoriam of Amedeo Amato, November 2022
(pp. 601-622)
JEL classification: E10; E31; E58; E62
Keywords: Cagan; Inflation; Patinkin Effect

Abstract

This paper reviews the debate on the stability of the inflation rate during high inflation and hyperinflation which started with Cagan (1956) seminal paper. In that paper Cagan arrives at the determination of the optimal inflation rate and the conditions for stability of inflation rates in situations of explosive price growth. The debate on Cagan’s model focused mainly on the type of expectations to be taken as a reference, assuming that in real terms the government deficit is unaffected by the rate of inflation. In this paper we review some of the perspectives that open on debate regarding Cagan’s model and hyperinflation if we assume that the government budget does, in fact, change in real terms due to inflation. Such changes can arise from the impact of price growth on the real value of both government revenue, the Olivera-Tanzi effect, and government spending, the Patinkin effect. The extent of this impact is key to define the conditions of stability of the inflation rate (whether high or low) and the amount of seigniorage obtained. The paper shows that during German hyperinflation the Patinkin effect was at work, reducing the real value of the government deficit.

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Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce