Monetary policy in economic transition: Lessons from the French post-war experience

Although tax and expenditure smoothing requires high deficits in 'transition' periods, this policy is difficult to implement because it leads to excess inflationary expectations and speculative attacks. This forces the government to adopt a suboptimally restrictive fiscal policy. It is argued that a potential explanation for this is that there is more incentive for 'weak' governments to act as 'strong' ones, as compared to non-transitional periods. The model explains well the immediate post-war inflation experience in France.