Hyperinflation -- A Kaleidoscope Of Uses And Abuses

Children playing with banknotes which have no more value, because of the inflation. Weimar Republic (Germany), circa 1919.PHOTO BY ALBERT HARLINGUE/ROGER VIOLLET/GETTY IMAGES

The word “hyperinflation” is sprinkled throughout the press each day. We read that Iran is hyperinflating. The same is written about Zimbabwe and Venezuela, as well as a potpourri of other countries that are experiencing inflation flare-ups. While Iran came close to a hyperinflation in the fall of 2012, it has never experienced an episode of hyperinflation. And, while Zimbabwe experienced hyperinflation episodes in 2007-2008 and 2017, it is not hyperinflating now. At present, Venezuela is the only country experiencing hyperinflation. It’s clear that journalists and those they interview tend to play fast and loose with the word “hyperinflation.”

To clean up the hyperinflation landscape, we must heed the words of the great Eugen von Böhm-Bawerk, one of the founders of the Austrian School of Economics, who, in 1891, wrote “…We too must bring into our science a strict order and discipline, which we are still far from having…by a disorderly and ambiguous terminology, we are led into the most palpable mistakes and misunderstandings – all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style.”

Yes. Nothing cleans up ambiguity disorder better than clear definitions. So, just what is the definition of the oft-misused word “hyperinflation?” The convention adopted in the scientific literature is to classify an inflation as hyperinflation if the monthly inflation rate exceeds 50%. This definition was adopted in 1956 after Phillip Cagan published his seminal analysis of hyperinflation, which appeared in a book edited by Milton Friedman, Studies in the Quantity Theory of Money.

Since I use high-frequency data to measure inflation in countries where inflation is elevated, I have been able to refine Cagan’s 50% per month hyperinflation hurdle. With improved measurement techniques, I now define a hyperinflation as an inflation in which the inflation rate exceeds 50% per month for at least thirty consecutive days.

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