The Realities of Modern Hyperinflation

• Author: Carmen M. Reinhart/Miguel A. Savastano
• Position: Deputy Director/Advisor, in the IMF's Research Department
• Pages: 20-23

Despite falling inflation rates worldwide, hyperinflation could happen again

Page 20

After World War I, a handful of European economies succumbed to hyperinflation. Austria, Germany, Hungary, Poland, and Russia all racked up enormous price increases, with Germany recording an astronomical 3.25 million percent in a single month in 1923. But, since the 1950s, hyperinflation has been confined to the developing world and the transition economies. The milder problem of chronic high inflation ceased to be a problem in the advanced economies in the 1980s and in the developing countries in the 1990s (Chart 1). In Latin America and the Caribbean, the average rate of inflation dropped from 233 percent a year in 1990-94 to 7 percent in 2000-02. In the transition economies, the decline over the same period was even greater, from 363 percent to 16 percent. And, in developing Asia, always a low-inflation region by developing country standards, inflation has recently stabilized at about 5 percent a year.

The benign inflation environment of recent years may lead some to believe that chronic high inflation and hyperinflation have been eradicated for good. History suggests that such a conclusion is not warranted. Mainly to keep this important issue at the forefront of policy debate, this article reviews the broad patterns in key macroeconomic policies and outcomes in all episodes of hyperinflation that have occurred in market economies since the mid-1950s. Following Philip Cagan's classic definition of hyperinflation, published in 1956, we define a hyperinflation episode as beginning in the month that the rise in prices exceeds 50 percent and as ending the month before the monthly rise in prices drops below that rate and stays below it for at least a year. Since the late 1950s, all episodes of this kind not associated with armed conflicts (domestic or foreign) have occurred in countries that already had a history of chronically high inflation: Argentina, Bolivia, Brazil, and Peru. For comparison, our analysis also includes Ukraine, which, of the former Soviet republics, suffered the longest-lasting high inflation.

Beginning and end

Modern episodes of hyperinflation are different from those that followed World War I. The hyperinflations of the 1920s sprang up swiftly and were rapidly brought to an end,Page 21 without much cost to employment and output, after governments implemented drastic fiscal and monetary reforms that restored currency convertibility and gave central banks independence to conduct monetary policy.

In contrast, modern hyperinflations have not been short and swift. In most cases, they have been preceded by years of chronic high inflation. In Argentina, Brazil, and Peru, for example, year-over-year...