hyperinflation

ending hyperinflation

1) fiscal reform- riding dependency on seigniorage reduce G and increase T 2) nominal anchor- decouple monetary policy from fiscal-wage price spiral. 3) inflation targets and fixed rate of money supply growth to increase credibility of CB 4) Fixed exchange rate (peg)- only print out enough money to keep the two currency's aligned

Case study- convertibility

argentina hyperinflation 1991, increased purchasing power can buy more with less currency, lotteries for returning sales receipts so close the number of unreported economic transactions so stops sellers from regestering sales thus avoiding VAT =informal economy tackled. also one peso for one USD so CB aloeed people to freely exchange and had enough USD to back up each peso giving the currency credibility

consequences of hyperinflation

costs of inflation are exacerbated, severe economic downturns. money ceases to function as a store of value, unit of account and a medium of exchange. as a result trade by barter occurs instead or a different foreign currency is used

causes of hyperinflation

excessive and rapid money supply growth- printing money. prices are proportional to 1/value. so price level is proportional to money supply

why governments create hyperinflation

governments can't raise taxes or sell bonds resort to printing money, as a result there are large differences in spending and revenue, low tax levels, willingness to lend to the government is low as international lenders don't trust in the ability of the government to pay back

inflation tax

reduces purchasing power, printing money creates wealth for G by reducing disposable income (real) for households

seigniorage

the revenue raised from printing money; the printing of money to pay for spending.

hyperinflation

when inflation is greater than 50% per month