Stabilization Policies in an Explosive Economy: Announcements and Expectations

The article studies policy options in an economy which is unstable under bond-financing of a predetermined government deficit. We analyze policies based on pre-announced changes in monetary control or on confi-scation of that part of the Government debt which could only be retired through a prolonged period of high inflation. The dynamics of the economy is characterized by the interplay between policy announcements and private agents' behaviour in reply to them.