Constraints on policy variables that are likely to develop in the context of the European Monetary System by 1992 are incorporated into a public finance framework. The effects of such constraints on the optimal use of the inflation and consumption tax are analyzed. Two questions are addressed:...

An optimizing model of dual exchange markets that are incompletely separated owing to the presence of fraudulent transactions is analyzed. The model is used to examine the implications of unanticipated and permanent changes in the commercial exchange rate and government spending. It is shown...

Standard real models predict that a permanent increase in oil prices would result in a current account surplus. The surplus occurs because investment falls while saving remains unchanged. This paper shows that if currency substitution is introduced into the analysis, a permanent increase in oil...

An important obstacle encountered in analyzing interest rate targeting is that standard models usually lead to indeterminacy of the price level or the inflation rate. This paper develops a simple framework that avoids such problems, because the bonds whose interest rate is controlled provide...

Central banks typically raise short-term interest rates to defend currency pegs. Higher interest rates, however, often lead to a credit crunch and an output contraction. We model this trade-off in an optimising, first-generation model in which the crisis may be delayed but is ultimately...

Since 1947, hyperinflations in market economies have been rare. More common have been longer inflationary processes at rates above 100 percent per annum. This paper examines the main characteristics of such very high inflation episodes. We find that (i) almost 20 percent of countries have...