The paper,
The Ends of Four Big Inflations, explains what happened in 4 hyperinflations after WWI. In each case the government was spending far beyond their taxes. In each case the inflation ended when they got their deficit under control. I believe this is true for all hyperinflations and can not find any counterexamples.
This was recommended to me by Tom Brown and Michael Salemi. Thanks to you both! I now recommend this paper to you.
I found another interesting paper,
Determinants of Hyperinflation: Case Studies from Latin America.
This
article on Weimar Germany is good.
"In each case the inflation ended when they got their deficit under control. I believe this is true for all hyperinflations and can not find any counterexamples."
ReplyDeleteAre you sure that the inflation "ended" when they got their deficit under control? Is the total destruction of a currency's purchasing power properly described as "ending inflation". For instance, the hyperinflation of the German Papiermark did not actually "end". The Papiermark currency was replaced with another currency unit, meaning that Papiermarks were essentially worthless when the replacement Rentenmark was issued in October 1923.
I mean that hyperinflation under that government ended when that government got its deficit under control. It does not really seem to matter if they make a new currency or keep the old one, except that there are usually too many zeros on the old one by then, and a lot of bad feeling toward it. So in practice it probably is good to make a new one.
DeleteHere's an excerpt from The Economic Consequences of the Peace by John Maynard Keynes where Keynes talks about the same thing. I think the paper actually refers to Keynes if I remember correctly.
ReplyDeletehttp://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html
The key to understanding the link between deficits and inflation is, I think, the nonlinearity that develops when government debts get really high. I know that I talk about this all the time, but it's absolutely crucial because central banks are forced to peg their yield curve when debt service costs become a very high percentage of tax revenues. Eventually, a debt restructuring and massive austerity is effectively forced.
Thanks! I added a Keynes View explanation of hyperinflation and a non-linear explanation. My list of explanations is getting long. :-)
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