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Hyperinflation with Currency Substitution: Introducing an Indexed Currency

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  • Federico Sturzenegger

Abstract

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.

Suggested Citation

  • Federico Sturzenegger, 1992. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," NBER Working Papers 4184, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4184
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    Cited by:

    1. William C. Gruben & Darryl McLeod, 2004. "Currency competition and inflation convergence," Center for Latin America Working Papers 0204, Federal Reserve Bank of Dallas.
    2. Sokic Alexandre, 2012. "The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money," German Economic Review, De Gruyter, vol. 13(2), pages 142-160, May.
    3. Gustavo Suárez R., 1999. "Tecnología de transacciones endógena y los costos de la inflación," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, issue 35, pages 55-85, June.
    4. Von dem Berge, Lukas, 2014. "Parallel currencies in historical perspective," CAWM Discussion Papers 75, University of Münster, Münster Center for Economic Policy (MEP).
    5. Francisco Carneiro & Joao Faria, 1997. "Currency substitution and indexed money," Applied Economics Letters, Taylor & Francis Journals, vol. 4(3), pages 163-166.
    6. Vazquez, Jesus, 1998. "How high can inflation get during hyperinflation? A transaction cost demand for money approach," European Journal of Political Economy, Elsevier, vol. 14(3), pages 433-451, August.
    7. Kem Reat Viseth, 2001. "Currency Substitution and Financial Sector Developments in Cambodia," International and Development Economics Working Papers idec01-4, International and Development Economics.

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