High inflation: causes and consequences

Using evidence from seven hyperinflationary episodes in four Latin American countries in the second half of the 1980s, John Rogers and Ping Wang examine the causes and consequences of high inflation. The article emphasizes four issues: the welfare costs of inflation and real costs of stabilization, the common features of the chronically high inflations experienced in Latin American countries, the main causes of high inflation, and the widely different outcomes of several stabilization programs. ; Rogers and Wang find that the welfare costs of even moderate periods of inflation may not be negligible, whereas the adverse macroeconomic effects of stabilization efforts are mostly temporary. The authors show that the spiral-like adjustment of the government budget and monetary growth may result in a high-inflation trap. The main causes of chronically high inflation include continuous fiscal-monetary extension, productivity slowdown, systematic undervaluation of the domestic currency, and diminished credibility of anti-inflation policies. Successful stabilization, in essence, results from budgetary adjustment, market liberalization, and the adoption of a nominal anchor (such as the nominal exchange rate), all of which ensure credibility of the public authorities.