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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.

Suggested Citation

  • Reinhart, Carmen & Savastano, Miguel, 2003. "The Realities of Modern Hyperinflation," MPRA Paper 7578, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:7578
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    References listed on IDEAS

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    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
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    Cited by:

    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, vol. 121(552), pages 319-350, May.
    2. 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.
    3. Salahodjaev, Raufhon & Chepel, Sergey, 2014. "Institutional Quality and Inflation," MPRA Paper 55272, University Library of Munich, Germany.
    4. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    5. John McDermott & Peter McMenamin, 2008. "Assessing Inflation Targeting in Latin America With a DSGE Model," Working Papers Central Bank of Chile 469, Central Bank of Chile.
    6. Rolando Gonzales Martínez, 2013. "Modeling Hyperinflation Phenomenon: A Bayesian Approach," Documentos de Investigación - Research Papers 8, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    7. Eric M. Leeper, 2009. "Anchoring fiscal expectations," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 17-42, September.
    8. de Mendonça, Helder Ferreira & de Guimarães e Souza, Gustavo José, 2012. "Is inflation targeting a good remedy to control inflation?," Journal of Development Economics, Elsevier, vol. 98(2), pages 178-191.
    9. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, March.
    10. 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.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F30 - International Economics - - International Finance - - - General

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