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Hyperinflation with Currency Substitution: Introducing an Indexed Currency

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  • Sturzenegger, Federico A

Abstract

Currency substitution (CS) or indexed currencies are believed to increase the equilibrium rate of inflation. This result derives from a setup in which the government finances a certain amount of real resources through money printing and where CS reduces the base of the inflation tax. This paper shows this intuition wrong for those situations where the hyperinflation is expectations-driven. Incorporating CS in an Obstfeld-Rogoff (1983) framework, we show, reduces the inflation rates along the hyperinflationary equilibrium. The intuition is simple: if money losses 'essentiality' - because a very close substitute develops or becomes available - then the inflation rates which induce agents to reduce their monetary balances fall. The implications of the model are then tested empirically. Copyright 1994 by Ohio State University Press.

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  • Sturzenegger, Federico A, 1994. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 377-395, August.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:377-95
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    Cited by:

    1. William C. Gruben & Darryl McLeod, 2004. "Currency competition and inflation convergence," Center for Latin America Working Papers 0204, Federal Reserve Bank of Dallas.
    2. Sokic Alexandre, 2012. "The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money," German Economic Review, De Gruyter, vol. 13(2), pages 142-160, May.
    3. Gustavo Suárez, 1999. "Tecnología De Transacciones Endógena Y Los Costos De La Inflación," Borradores de Economia 3545, Banco de la Republica.
    4. Von dem Berge, Lukas, 2014. "Parallel currencies in historical perspective," CAWM Discussion Papers 75, University of Münster, Münster Center for Economic Policy (MEP).
    5. Francisco Carneiro & Joao Faria, 1997. "Currency substitution and indexed money," Applied Economics Letters, Taylor & Francis Journals, vol. 4(3), pages 163-166.
    6. Vazquez, Jesus, 1998. "How high can inflation get during hyperinflation? A transaction cost demand for money approach," European Journal of Political Economy, Elsevier, vol. 14(3), pages 433-451, August.
    7. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics.

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