API120 - Prof. J.Frankel LECTURE 9: SEIGNIORAGE & HYPERINFLATION Key Question: Government attempts to stimulate the economy may explain moderate levels of money growth & inflation…. but why do high rates of inflation -- even hyperinflation -- sometimes occur?
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LECTURE 9: SEIGNIORAGE & HYPERINFLATION estimate: In Nov. 2008, inflation rate p.a. supposedly at 89.7 sextillion (1021)%. Dec. 2008, inflation p.a. at (6.5 x 10108 %). In April 2009,
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API120 - Prof. J.Frankel
LECTURE 9: SEIGNIORAGE & HYPERINFLATION
Key Question:
Government attempts to stimulate the economy may explain moderate levels of money growth & inflation….
but why do high rates of inflation -- even hyperinflation -- sometimes occur?
The world’s most recent
hyperinflation: Zimbabwe,
2007-08
It reached 2,600% per mo. in mid-2008.
Inflation reached 50% per month in March 2007, meeting definition of hyperinflation.
One estimate: In Nov. 2008, inflation rate p.a. supposedly at 89.7 sextillion (1021)%.
Dec. 2008, inflation p.a. at (6.5 x 10108 %).
In April 2009, printing of the Zimbabwean dollar stopped; the S.Afr. Rand & US $ became the standard currencies for exchange.
API120 - Prof. J.Frankel
The driving force? Increase in money
supply:
The central bank monetized
government debt.
The exchange rate increased along with
the price level.
Both increased far more than
the money supply. Why?
When the ongoing inflation rate is
high, the demand for money is low,
in response. For M/P to fall, P must go up more than M.
API120 - Prof. J.Frankel
How do governments finance spending?
• Taxes
• Borrowing ● Domestic † ● Abroad
• Seigniorage ≡ creating money to finance deficits
† Regarding government borrowing, you may encounter -- “Ricardian” debt neutrality (Barro): People know taxes eventually will rise; so Saving ↑ . -- “Fiscal dominance” (Sargent & Wallace; Woodford): people know that the debt eventually will be monetized. So P ↑ .
Inflation tax ≡ Money creation in excess of money demand justified by real growth.
API120 - Prof. J.Frankel
Pre-euro revenues from the inflation tax, Greece, 1845-2000
Carmen Reinhart & Christoph Trebesch, 2015, “The Pitfalls of External Dependence: Greece, 1826-2015,” Brookings Panel on Economic Activity,” September