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The Political Economy of Stopping High Inflation

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  • Martin Paldam

Abstract

First the process of high inflation is described. The theory presented is built around nine stylized facts. The high inflations have always political explanations and strong political consequences. Two traditional cures for high inflation are to apply a nominal anchor: Fix the money stock by closing the budget dificit or fix the nominal exchange rate. In both cases the braking is painful, and it often breaks down. The third traditional cure is an incomes policy, which often works in the short run, but not in the long run. By combining a hard incomes policy with a closing of the budget deficit and a fixed exchange rate, it is possible, but not easy, to stop high inflation painlessly. Finally institutional reform is discussed.

Suggested Citation

  • Martin Paldam, "undated". "The Political Economy of Stopping High Inflation," EPRU Working Paper Series 93-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:93-05
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    Cited by:

    1. Bernholz, Peter & Kugler, Peter, 2007. "The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations," Working papers 2007/13, Faculty of Business and Economics - University of Basel.
    2. Giovanni B. Pittaluga & Elena Seghezza & Pierluigi Morelli, 2021. "The political economy of hyperinflation in Venezuela," Public Choice, Springer, vol. 186(3), pages 337-350, March.
    3. Bordo, Michael D. & Jonung, Lars, 1994. "Monetary Regimes, Inflation and Monetary Reform: An Essay in Honor of Axel Leijonhufvud," SSE/EFI Working Paper Series in Economics and Finance 16, Stockholm School of Economics.
    4. Peter Bernholz & Peter Kugler, 2009. "The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations," German Economic Review, Verein für Socialpolitik, vol. 10(2), pages 165-175, May.
    5. Petrovic, Pavle & Vujosevic, Zorica, 1996. "The monetary dynamics in the Yugoslav hyperinflation of 1991-1993: The Cagan money demand," European Journal of Political Economy, Elsevier, vol. 12(3), pages 467-483, November.
    6. C. Emre Alper, 2001. "The Turkish Liquidity Crisis of 2000: What Went Wrong..," Working Papers 2001/11, Bogazici University, Department of Economics.
    7. Daniel Arce, 1997. "Fiscal Pacts," Open Economies Review, Springer, vol. 8(3), pages 271-284, July.
    8. Miller, Stephen Matteo & Ndhlela, Thandinkosi, 2020. "Money demand and seignorage maximization before the end of the Zimbabwean dollar," Journal of Macroeconomics, Elsevier, vol. 63(C).
    9. Tsyplakov Alexander, 2001. "Does Lower Inflation Imply Lower Price Uncertainty?," EERC Working Paper Series 2k/06e, EERC Research Network, Russia and CIS.
    10. Peter Bernholz & Peter Kugler, 2009. "The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations," German Economic Review, Verein für Socialpolitik, vol. 10, pages 165-175, May.

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