Economic Exchange during Hyperinflation

Alessandra Casella and Jonathan Feinstein ()

Journal of Political Economy, 1990, vol. 98, issue 1, 1-27

Abstract: The authors construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange. In their model, buyers must carry cash while shopping, and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good. Since buyers face the constant threat of incoming younger (hence richer) customers, their bargaining position is weakened by inflation, allowing sellers to extract a higher real price. However, they show that higher inflation also reduces buyers' search, increasing sellers' wait for customers. As a result, the volume of transactions concluded in the decentralized sector falls. At high enough rates of inflation, all agents suffer a welfare loss. Copyright 1990 by University of Chicago Press.

Date: 1990
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