Uncertainty and Hyperinflation: European Inflation Dynamics after World War I

Jose Lopez and Kris James Mitchener

No 24624, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks – and correspondingly high levels of uncertainty – caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border disputes. In contrast, other European countries exhibited lower levels of measured uncertainty between 1919 and 1925, allowing them more capacity with which to implement credible commitments to their fiscal and monetary policies. Impulse response functions show that increased uncertainty caused a rise in inflation contemporaneously and for a few months afterward in GAPH, but this effect was absent or much more limited for the other European countries in our sample. Our results suggest that elevated economic uncertainty directly affected inflation dynamics and the incidence of hyperinflation during the interwar period.

JEL-codes: E3 E31 E4 E52 E62 N14 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-his, nep-mac and nep-mon
Note: DAE ME
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Published as Jose A Lopez & Kris James Mitchener, 2021. "Uncertainty and Hyperinflation: European Inflation Dynamics after World War I," The Economic Journal, vol 131(633), pages 450-475.

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Related works:
Journal Article: Uncertainty and Hyperinflation: European Inflation Dynamics after World War I (2021)
Working Paper: Uncertainty and Hyperinflation: European Inflation Dynamics after World War I (2018)
Working Paper: Uncertainty and Hyperinflation: European Inflation Dynamics after World War I (2018)
Working Paper: Uncertainty and Hyperinflation: European Inflation Dynamics after World War I (2018)
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