Hyperinflation with Currency Substitution: Introducing an Indexed Currency

Sturzenegger, Federico

Hyperinflation with Currency Substitution: Introducing an Indexed Currency

No 4184, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1992-10
Note: IFM ME
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Published as Journal of Money, Credit and Banking, August 1994

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Related works:
Journal Article: Hyperinflation with Currency Substitution: Introducing an Indexed Currency (1994)
Working Paper: Hyperinflation with Currency Substitution: Introducing an Indexed Currency (1992)
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