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Hyperinflation: Inflation tax and economic policy regime

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  • Barbosa, Fernando de Holanda

Abstract

This paper shows that price level indeterminacy in monetary models with multiple equilibria can be solved by the selection of an appropriate monetary policy regime, according to the demand elasticity of the real quantity of money with respect to inflation rate. Money is essential when this elasticity is less than one, in absolute value. In the monetary regime, in which the central bank controls money growth, hyperinflation does not occur when money is essential, but may occur when it is not. In the fiscal regime, typical of the 20th century's hyperinflation experiences, wherein the issuance of money is used to finance the public deficit, the hyperinflation of stationary equilibrium occurs when money is essential and the public deficit reaches a critical value. However, if money is not essential such equilibrium does not exist. The essentiality of money is therefore an important aspect to consider and should not be decided on the basis of merely theoretical arguments. The hypothesis that the social cost of hyperinflation is infinite cannot be rejected a priori, but it has to be tested by using inflation tax data from hyperinflation experiences.

Suggested Citation

  • Barbosa, Fernando de Holanda, 2002. "Hyperinflation: Inflation tax and economic policy regime," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 22(2), November.
    • Handle: RePEc:sbe:breart:v:22:y:2002:i:2:a:2736
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