The roots of hyperinflation

Feb 12, 2018

IN a country where the annual inflation rate is in four figures, the previous month can seem like a golden age. Venezuela’s currency, the bolívar, has lost 99.9% of its value in a short time. It is hard to fathom how a government can get its economic policy so wrong when the effects of hyperinflation are so severe. What are its causes?

Start with a definition. In 1956 Phillip Cagan, an economist working at America’s National Bureau of Economic Research, published a seminal study of hyperinflation, which he defined as a period in which prices rise by more than 50% a month. The phenomenon is rare. Steve Hanke, of Johns Hopkins University, and his colleagues have documented 57 cases, of which Venezuela is the most recent. Often the backdrop is revolution, war or political transition. The first recorded episode occurred between 1795 and 1796, in revolutionary France. There was a cluster of hyperinflations in Europe after the first world war, notably in Germany, and in the early 1990s in countries affected by the break-up  the Soviet Union....Continue reading

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