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Hyperinflation

Definition

In economics, hyperinflation is very high and typically accelerating inflation. It quickly erodes the real value of the currency, as the prices of most or all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies. Prices typically remain stable in terms of other currencies.

An out of control or extremely rapid inflation is known as hyperinflation. There is no definite numeric representation or definition of hyperinflation. Hyperinflation refers to the situation where the prices of commodities go so out of hand that the concept of inflation becomes essentially meaningless.

Hyperinflation results in an erosion of the real value of local currency and therefore, the population tends not to hold too much of the local money. The population, on the contrary, start holding foreign currency that is relatively stable than the local one. The official currency of a country loses its real value quickly, and the price level of economy goes up rapidly. In terms of foreign currency, the value of economic items remains relatively more stable.

Why does it occur?

One of the major causes of hyperinflation in any country is the deficit of the government that is continuously financed by increasing the amount of money. The government does not borrow or puts taxes on money, but rather just prints out vast amounts of money to meet the deficit. Hyperinflation is associated with social and political turmoil, wars, their aftermaths, and other crises, making it difficult for the government to put taxes on their population.

During the periods of depression, when there is a large influx of money, but it is not supported by a relative increase in the gross domestic product (GDP) of the country, hyperinflation is the usual effect. Since there is an evident imbalance of supply and demand in such an economy, the prices of commodities continue hiking unchecked, and the currency, hence, loses its value.

During the times of war, since there is a lack of confidence in the ability of a country’s currency for keeping its value intact, hyperinflation occurs. A risk premium is demanded by the sellers and thus the pries of the commodities rise, bringing down the value of the currency of the country.

Effects of Hyperinflation

Hyperinflation is related to the wiping out of the purchasing power of the local population, and the distortion of economy. The real assets are hoarded, and the currency is used to flee the country.

Remedy

Drastic measures need to be taken to end the eras of hyperinflation. One such measure is shock therapy which includes slashing the expenditure of the government and changing the currency basis. Foreign currency may also be used as the national currency under such circumstances.


Further Reading


The realities of modern hyperinflation
mpra.ub.uni-muenchen.de [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …

Indexation, inflationary finance, and hyperinflation: the 1945-1946 Hungarian experienceIndexation, inflationary finance, and hyperinflation: the 1945-1946 Hungarian experience
www.journals.uchicago.edu [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …

The hyperinflation model of money demand revisitedThe hyperinflation model of money demand revisited
www.jstor.org [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …

Fiscal reforms and stabilisation: four hyperinflation cases examinedFiscal reforms and stabilisation: four hyperinflation cases examined
www.jstor.org [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …

Budget deficits, stability, and the monetary dynamics of hyperinflationBudget deficits, stability, and the monetary dynamics of hyperinflation
www.jstor.org [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …

Stock returns during the German hyperinflationStock returns during the German hyperinflation
www.sciencedirect.com [PDF]
… Another impetus, however, for undertaking this study originated from my interest in monetary economics … war finance, influenced in any fashion the development of post-war hyperinflation in that … Finally, as I am an applied econometrician interested in economic history, I decided …



Q&A About Hyperinflation


What does hyperinflation mean?

Hyperinflation means that the prices of commodities go so out of hand that the concept of inflation becomes essentially meaningless.

What is hyperinflation?

Hyperinflation is a period of time where the inflation rate exceeds 50% per month.

Is there a numeric representation for hyperinflation?

No, there is no definite numeric representation or definition for hyperinflation.

When did Germany experience hyperinflation?

Germany experienced hyperinflation between 1921 and 1923 primarily in 1923.

Who or what caused this period of time to be called "hyperinflation"?

The government's decision to fund their war efforts entirely through borrowing caused this period of time to be called "hyperinflation".

When does hyperinflation occur most often?

During times of war and their aftermaths, since there is a lack in confidence in the ability to hold value intact.

What was the currency affected by hyperinflation?

The German Papiermark, the currency of the Weimar Republic, was affected by hyperinflation.

How can you define hyperinflation?

Hyperinflation occurs when the prices of commodities go so out of hand that the concept of inflation becomes essentially meaningless.

How were citizens negatively impacted by this event?

Citizens were negatively impacted because they had no money for food and other necessities. They also suffered from political instability due to internal conflict over how to end this crisis.

Why do people hoard foreign currency during periods of hyper-inflations?

The official currency loses its real value quickly, and people tend not to hold too much local money because it erodes its value quickly. People start holding foreign currency instead which tends to be relatively stable than local money. Foreign currency tends to have more real value than local money because it retains its purchasing power over time better than other currencies due to low levels of inflation and high interest rates on savings accounts (which are usually higher than those offered by banks).

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