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This chapter examines several dramatic historical experiences that are consistent with the “rational expectations” view but that seem difficult to reconcile with the “momentum” model of inflation. The idea is to identify the measures that successfully brought drastic inflations under control in several European countries in the 1920s, namely: Austria, Hungary, Germany, and Poland, all of which experienced a dramatic “hyperinflation” in which, after the passage of several months, price indexes assumed astronomical proportions. The experience of Czechoslovakia is also considered. Within each of Austria, Hungary, Poland, and Germany, there occurred a dramatic change in the fiscal policy regime, which in each instance was associated with the end of a hyperinflation. Czechoslovakia deliberately adopted a relatively restrictive fiscal policy regime in order to maintain the value of its currency.

This chapter examines the French Revolution from the vantage point of macroeconomic theories about government budget constraints. From 1688 to 1788, Britain won and France lost three of four wars. France recurrently defaulted on its debt, while Britain did not. After 1688, Britain had reformed its institutions to allow it to raise enough taxes during peacetime to finance debts incurred in times of war, while France sustained institutions designed to constrain the king's revenues. The chapter considers two macroeconomic ideas and three models of money: unpleasant arithmetic, sustainable plans, tax-backed or asset-backed models of the demand for currency, legal restrictions models of the demand for currency, and classical hyperinflation models along lines described by Phillip Cagan. Inflation during the French Revolution are interpreted in terms of a procession of regimes in which the “if” parts of the three types of monetary models are approximately fulfilled.

This chapter examines the failure of German diplomatic efforts to resolve the Ruhr Crisis during May and June 1923. Deficiencies in the German proposals combined with French intransigence to stymie the initiative, as well as British attempts at mediation. Thereafter, as humanly unbearable conditions undermined law and order in the Ruhr, the Prussian and German authorities were forced increasingly to the Allied will. Communist-inspired strikes and food riots became commonplace. Hyperinflation undermined any orderly payment of wages or salaries and simultaneously undermined most forms of retail commercial activity. Women queued for hours in desperate attempts to secure scraps of food, while their menfolk shuffled to work barefoot and malnourished. Some industrialists began to contemplate collaboration.

This chapter and the next describe the fiscal war of attrition that fueled inflation in the 1920s. That war proved most intractable in Germany, where it was fought internationally as well as on the domestic front. The German hyperinflation that resulted from this deadlock is the subject of Ch. 5. The different sections of the chapter look at the background (the post World War I reparations tangle), the transition to hyperinflation, the impact of inflation on the German economy, the stabilization that followed the revaluation of government reserves and pegging of the exchange rate in November 1923, and the implications for international monetary relations.

This chapter assesses the empirical merits of PcGets and Autometrics — two recent algorithms for computer-automated model selection — using them to improve upon Kamin and Ericsson's (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correction model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a ‘ratchet’ variable that captures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis.

This chapter investigates the ways the medium of money itself established a conceptual framework for the experience of the great German inflation. It examines how the hyperinflation damaged the basic functions of money and how the daily lives of people were affected by the increasing breakdown of the many functions of money. It suggests that the very image and sight of piles of paper money remain among the most striking features of the inflation of that time. It also discusses the role of money as an ideological vessel within the antimodernist discourse of the 1920s.

This chapter discusses how the legacy of the war in the South—hyperinflation and debt repudiation—was a disaster for southern creditors, including banks. Southern planters remained the largest landowners in their home counties, even though everyone was poorer than before the war. From this foundation of economic leadership, the antebellum elite regained political control after Reconstruction. In Missouri, because of the forced land sales, planters persisted in the postwar era at lower rates than they would have otherwise. The chapter reveals that in the decades following the war, plantations almost disappeared from the Boonslick, as did nearly the entire African American population. Missouri increasingly differed from the former Confederate states in population, demography, agriculture, land ownership, and politics. In Missouri, the combination of the forced land sales and northern immigration achieved what the Radical Republicans could not in the Confederacy proper.

At the time of the fall of the Iron Curtain, Slovenia was the wealthiest part of the Socialist Federal Republic of Yugoslavia (SFRY) and had more contact with Western markets. Slovenia, however, also inherited a large public debt burden and hyperinflation. These resulted in privatisation processes, the decline of traditional industrial sector, an expansion of the service sector and, as a consequence, a massive loss of jobs for the less qualified industrial labour force. Economic and social restructuring was accompanied by the loss of the employment security and a reduction of social rights provided by the state. In the second half of the 1990s, however, the economy started to recover and unemployment began to decline. This economic growth, which by 2005 had turned into an economic boom, increased the activity rate of the population and transformed Slovenia into one of the most successful new members of the European Union (EU).

This chapter moves from studying developed countries to a sample of countries in Latin America over time. The chapter presents evidence that an increase in the information environment, in terms of its level of precision, exerts an attenuating and significant effect on the mean and standard deviation of forecasters’ inflation expectations, ultimately lowering inflation outcomes. The finding is robust to the inclusion of policy credibility, persistence in inflation, economic output, and month and country effects. When conducting instrumental variable analysis, similarly signed results hold. The main results imply that an increase in information precision helps to lower aggregate levels of inflation and that the channel that this works through is by lowering the weight of prior expectations, as predicted by the theoretical argument. Importantly, the results persist even when considering a sample of countries with relatively variable inflation outcomes and less established (and therefore less credible) economic institutions.

The aim of macroeconomic stabilization is restoring price stability and reducing monetary, fiscal, and balance-of-payment imbalances. Macroeconomic stabilization is particularly needed when a country suffers from high inflation or hyperinflation. To stop such an inflation one can choose between three types of anti-inflationary programmes: orthodox money-based, orthodox exchange rate-based, and heterodox. Other cases of macrostabilization policy include reducing excessive fiscal deficit and public debt before they become monetized, dealing with the deflationary consequences of the systemic banking crisis, reducing the excessive current account deficit, dealing with the consequences of a sudden stop in capital flows, and fighting chronic moderate inflation. Fiscal rules, and the independence of monetary and fiscal institutions such as central banks, play an important role in preventing macroeconomic instability. National macroeconomic policies are also monitored from outside, for example by the International Monetary Fund and European Commission (in the case of EU member states).

Israel's high inflation calamity amounted to a crisis of political and economic institutions. Failing economic governance made it essential for the government to raise revenue through money expansion. At the time when the newly elected government was catering to populistic demands, the printing press was used to finance the fast-expanding government spending and transfers. The central lesson from the Friedman (1971) is that steady-state seigniorage from revenue maximizing central bank is small. However, Israel, as well as previous historical episodes, offer a counter example. Inflation spikes can be a significant source for government revenue. Following almost 8 years of the hyperinflation economic chaos, the Israeli voters brought about some major political rebalancing towards the political center. Sargent (2009) argues that high inflation can be stopped quickly, and at a low cost. His argument is that inflationary expectations are quick to adjust when the economic regime shifts considerably. The temptation not to stop inflation in its tracks may be irresistible. Similarly, if the government surprise market participants by abrupt stopping of hyperinflation in the presence of entrenched inflation expectations, the fiscal burden of public sector wage bill and subsidies to basic food must rise. Therefore, the government may hesitate to do so. To overcome this difficulty there must be a full-fledged social agreement between the government, savers (who hold government bonds), public sector wage earners, and recipients of food subsidies. To fix the inflated outlays on debt service, wage bill, and subsidies, some major redistribution of income must accompany the inflation-halting step. This is in essence the lesson from Israel’s inflation stabilization policy.

This chapter considers the legal background to and consequences of the German hyperinflation between 1914 and 1948. It discusses how legislators, courts, and lawyers responded to a ‘lack of good money’ that has been produced by German government. The chapter outlines the political, economic, and monetary framework between 1914 and 1925, highlighting its most important legal aspects. It analyses the war economy and the inflation-related case law of the Reichsgericht. Finally, it summarizes the developments during the period, beginning with the revaluation laws of 1924–5 through to the monetary reform of 1948.

Inflation was a major concern during the three years that the book covers in extra detail. But the economics of inflation and the science of monetary and fiscal policy, especially in an emerging economy, are inadequately understood. The chapter provides a dissection of monetary policy including some conundrums of how to control inflation while keeping growth up.