Hyperinflation in a small open economy with a fixed exchange rate: A post Keynesian view

This paper examines the emergence of hyperinflation in a small open economy with a fixed exchange rate from a post Keynesian perspective. Three variables play key roles: distributive conflict, external debt, and expectations about the exchange rate. First, we propose a short-run Kaleckian macro model. Then, we study the long-run behavior of the model by endogenizing the price level and foreign indebtedness. We conclude that the existence of expectations about the nominal exchange rate is crucial to explaining the emergence of hyperinflation.     

Inflation and Financial Statement Analysis in the International Accounting Classroom

This article provides an exercise for students to contemplate the effects of inflation during financial statement analysis. Even small amounts of inflation accumulating over time can grow to distort a company's reported financial position and results of operations. The growing economies in emerging markets, the international market for oil, and other economic factors threaten to increase inflation rates in the future. As a result of changing global conditions, interest in inflation accounting is expected to increase. The exercise we suggest in this article provides an efficient tutorial on the potential effects of inflation on financial statement analysis and on the application of International Accounting Standard 29 in hyperinflationary environments.     

A Novel End to the Big Inflation in China in 1950*

The Chinese inflation of 1949-1950 was fueled by large budget deficits but was ended in March 1950 before significant deficit reduction occurred. We discuss the fiscal strains that gave rise to this inflation and consider the role played by early Communist market-based anti-inflationary measures such as the 'economic warfare' against speculators conducted by the government's state trading companies. While later monetary and fiscal tightening sustained the stabilization achieved in March – at considerable cost to the real economy – the Chinese experience seems to confirm that there is more to inflation stabilization than fiscal balance alone. This revised version was published online in July 2006 with corrections to the Cover Date.     

Destabilizing effects of a successful stabilization: a forward-looking explanation of the second Hungarian hyperinflation

Summary. The extreme severity of the second Hungarian hyperinflation is argued to be related to the unusual way in which the inflation was eventually stabilized. The historical features of this episode are represented in a general equilibrium model, which incorporates a transition from one monetary regime to another. During the inflation the government finances a fixed deficit with seigniorage revenue. After the stabilization the government budget is balanced and the central bank engages in a program of subsidized lending to the private sector. Stabilization is achieved by targeting a low inflation rate path through adjustments in the quantity of central bank lending. I show that under this stabilization policy (1) the dynamic equilibrium path of the economy is indeterminate and (2) arbitrarily high pre-stabilization inflation rates are possible. Received: November 5, 1998; revised version: November 30, 1998     

Notes and Communications

Summary This essay explores the occurrence of illusionary images or trompe-l’oeil in economics and their role in economic policy design. In this context four specific examples are discussed, relating to money illusion, the bias in the consumer price index to measure purchasing power, the econometrics of hyperinflation and the measurement of scholarly productivity. Fellow Tinbergen Institute and the Managing editor of De Economist. Until 2001 deputy executive director as well as head of research with De Nederlandsche Bank and from January 2003 professor emeritus in monetary economics, University of Amsterdam. I am grateful to professor J.S. Cramer and dr Peter van Els for their useful comments.     

Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey

This paper estimates the Cagan type demand for money function for Turkish economy during the period 1986:1–1995:3 and tests whether Cagan's specification fits the Turkish data using an econometric technique assuming that forecasting errors are stationary. This paper also tests the hypothesis that monetary policy was implemented in aiming to maximize the inflation tax revenue. Finally, the Cagan model is estimated with the additional assumption of rational expectations for Turkey for the considered period. First version received: March 1998/final version received: October 1998     

Testing the currency-substitution model under the German hyperinflation

In this paper the currency-substitution model is tested under the German hyperinflation using several expectations-formation mechanisms. The maximum-likelihood estimates of the currency-substitution model reveal that extrapolative and adaptive expectations seem to have been predominant and that there was a significant degree of currency substitution. The results also reveal that expectation was destabilizing and that it was not possible to distinguish between the effects of the expected change in the exchange rate and the expected inflation.     

Inaccurate Approximation in the Modelling of Hyperinflations

In time series macroeconometric models, the first difference in the logarithm of a variable is routinely used to represent the rate of change of that variable. It is often overlooked that the assumed approximation is accurate only if the rates of change are small. Models of hyper-inflation are a case in point, since in these models, by definition, changes in price are large. In this letter, Cagan’s model is applied to Hungarian hyper-inflation data. It is then demonstrated that use of the approximation in the formation of the price inflation variable is causing an upward bias in the model’s key parameter, and therefore an exaggeration of the effect postulated by Cagan.     

Georgia's economic collapse, 1991-1994: the role of state orders and inflation

In the Republic of Georgia, hyperinflation interacted with the state order system to create a self-perpetuating cycle and an almost total collapse of the economy. Breaking this “vicious cycle” required a number of simultaneous reforms in price, trade, and tax policy, which would not have worked as well had they been undertaken piecemeal. This history argues in favor of a “big bang” approach to reform in transition economies.     

A simple analytical model of the adverse real effects of inflation

Abstract

The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.