CIAO DATE: 12/2012
November 2012
Peterson Institute for International Economics
Hyperinflation—usually 1,000 percent or more a year—occurs only under very special circumstances: in a disorderly breakup of a currency zone; after wars or revolutions, when monetary or fiscal authorities lack control; and when wild populism prevails. Åslund reviews the historical record and shows that hyperinflation does not arise by mistake but because of major dysfunction or mismanagement. Responsible countries with reasonable governance may default, but they do not have hyperinflation. The danger of hyperinflation, therefore, is an irrelevant concern for ordinary monetary policy. However, the fact that collapse of a large currency union with substantial imbalances usually causes hyperinflation raises concerns for the euro area. Large uncleared payments balances have accumulated between the member countries as the private interbank market has stopped functioning. On the one hand, the uncleared balances have grown massively and, on the other, the creditor countries demand that balances be capped, which would mean disruption of the currency zone. It is critical to prevent a disorderly collapse of the euro area at almost any price, and the most obvious measure is vigorous monetary expansion, even more so than at present. There is no historical evidence of monetary easing or even quantitative easing leading to hyperinflation. The second measure should be more rigorous fiscal austerity in the troubled countries.
Resource link: Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One [PDF] - 102K