Hyperinflation with Currency Substitution: Introducing an Indexed Currency / Federico Sturzenegger.

Format:

Book

Author/Creator:

Sturzenegger, Federico.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4184.

NBER working paper series no. w4184

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Hyperinflation with Currency Substitution

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Summary:

Currency substitution (CS) and financial adaptation are in general believed to increase the equilibrium rate of inflation. This result derives from a setup in which the government finances a certain amount of real resources through money printing and where CS reduces the base of the inflation tax. This paper shows this intuition wrong for those situations where the hyperinflation is expectations-driven. Incorporating CS in an Obstfeld-Rogoff (1983) framework I show reduces the inflation rates along the hyperinflationary equilibrium. The intuition is simple: if agents have an easy way of substituting away from domestic currency then the required inflation rates to sustain a path where real balances disappears is necessarily lower. The implications of the model are then tested empirically.

Notes:

Print version record

October 1992.