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The Realities of Modern Hyperinflation

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  • Reinhart, Carmen
  • Savastano, Miguel

Abstract

Policymakers would do well to bear in mind the seven lessons that emerge from this overview of modern hyperinflations. Hyperinflations seldom materialize overnight and are usually preceded by a protracted period of high and variable inflation.Stabilization may take years if fiscal policies are not adjusted appropriately. Even when fiscal adjustment is implemented, it takes time to achieve low inflation, especially when money is used as the nominal anchor.Sharp reductions in fiscal deficits are always a critical element of a stabilization program, regardless of the choice of monetary anchor.Unifying exchange markets and stablishing currency convertibility are often essential ingredients of stabilization, irrespective of the choice of main nominal anchor.Output collapses during, and sometimes in the run-up to, hyperinflation. Although stabilization measures cap the implosion in economic activity, there is little evidence to suggest that they kindle a robust rebound in economic activity.Hyperinflations are accompanied by an abrupt reduction in financial intermediation.Stopping a hyperinflation does not restore demand for domestic money and domestic currency assets to the levels that prevailed before the hyperinflation began. Capital returns to the country when high inflation stops, but dollarization and other forms of indexation dominate financial intermediation for many years.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7578.

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Date of creation: 2003
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Publication status: Published in Finance and Development, 2.40(2003): pp. 20-23
Handle: RePEc:pra:mprapa:7578

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Cited by:
  1. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, vol. 121(552), pages 319-350, 05.
  3. Eric M. Leeper, 2009. "Anchoring Fiscal Expectations," NBER Working Papers 15269, National Bureau of Economic Research, Inc.
  4. Paolo Zagaglia, 2007. "Operational Fiscal and Monetary Policy with Staggered Wage and Price Dynamics," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 121-138, Autumn.
  5. Jens R. Clausen & Sharmini Coorey & Bakar Ould-Abdallah & Sònia Muñoz & Norbert Funke, 2007. "Lessons From High Inflation Epidsodes for Stabilizing the Economy in Zimbabwe," IMF Working Papers 07/99, International Monetary Fund.

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