A (not so brief ) history of inflation in Austria

We analyze the eventful history of inflation in Austria over the past two centuries against the background of institutional, economic and political developments. Ultra-high inflation or hyperinflation resulted from repeated monetary financing of war expenses, war-related destruction of productive capacity as well as fear of short-term political and social consequences of anti-inflationary measures. Like other countries, Austria experienced the highest inflation during peaceful times in the 20th century when efforts were made to cushion the negative output effects of oil price shocks. Inflation volatility was high in the 19th century up to the Gründerzeit boom and in the 20th century during the Great Inflation; it was low in the half-century up to World War I and during the Great Moderation. Our frequency domain analysis for the pre-World War I and post-World War II periods finds that, in line with the economic literature, the correlation between money growth and inflation is considerably higher for long and very long frequencies than for business cycle frequencies. The varying correlation between money and inflation reflects changing monetary regimes. We cannot establish a stable empirical Phillips curve relationship; in the post-World War II period, the relationship breaks down once supply shocks (oil prices) are included. Deflation was quite frequent in 19th-century Austria and was not necessarily associated with recessions. By contrast, Austria’s 20th century Great Depression fits the textbook notion of deflation, high unemployment and economic slack. Formal central bank independence did not prevent the erosion of monetary value in “emergency situations” of wars. Hyperinflations and currency reforms repeatedly inflicted substantial and long-lasting damage on citizens’ trust in state money and in the state more generally.