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I don't understand something about this story. Hyperinflation is primary caused by government printing money right? So if switching to another currency helped

I don't understand something about this story. Hyperinflation is primary caused by government printing money right? So if switching to another currency helped stop this...I get how it could help people changing their perceptions, but wouldn't the root cause be that the government stopped printing money with the new currency? It seems like it would have been almost as effective if they had simply stopped printing more of the original currency until things stabilized? Maybe I'm missing something. But the article seems to put too much weight on this clever idea of shifting to a new currency. While if monetary policy had stayed the same with the new currency I don't think it would have made any difference. The monetary policy here was the important part, not the new currency.

quadhome 16y ago
I had the same question. The Wikipedia article on the URV lead me to "Inertial inflation." In the medium-to-long term, economic agents begin to forecast inflation and to use those forecasts as de facto price indexes that can trigger price adjustments before the actual price indices are made known to the public. This cycle of forecast-price adjustment-forecast closes itself in the form of a feedback loop and inflation indices get beyond control since current inflation becomes the basis for future inflation (more formally, economic agents start to adjust prices solely based on their expectations of future inflation). At worst, inflation tends to grow exponentially (leading to hyperinflation). http://en.wikipedia.org/wiki/Inertial_inflation http://en.wikipedia.org/wiki/Inertial_inflation
- barmstrong 16y ago
  Interesting, thanks for posting that (it is probably what the author is basing it on)...although it's probably more accurate to call this one theory of how it could happen. The reasoning behind it doesn't fully make sense to me. Simple reason: people spending money as fast as they can (the shot in the arm that can accelerate hyperinflation) has a natural limit: when people have no more savings! So I don't think it's correct to call this a positive feedback loop. It has a natural limit that could be reached quite quickly under hyperinflation. Indexes can only takes things so far too - if you (as a business owner) follow them and nobody can afford your products, you'll quickly figure it out and drop prices. So it seems weird to say indexes could cause hyperinflation over any medium-long time frame.
acqq 16y ago
In Yugoslavia in nineties during the big hyperinflation everybody was calculating the prices in German Marks, still hyperinflation progressed until the specific political decisions happened. I also consider the article as such an oversimplification that the real insight is actually lost.

quadhome 16y ago

I had the same question. The Wikipedia article on the URV lead me to "Inertial inflation." In the medium-to-long term, economic agents begin to forecast inflation and to use those forecasts as de facto price indexes that can trigger price adjustments before the actual price indices are made known to the public. This cycle of forecast-price adjustment-forecast closes itself in the form of a feedback loop and inflation indices get beyond control since current inflation becomes the basis for future inflation (more formally, economic agents start to adjust prices solely based on their expectations of future inflation). At worst, inflation tends to grow exponentially (leading to hyperinflation). http://en.wikipedia.org/wiki/Inertial_inflation http://en.wikipedia.org/wiki/Inertial_inflation

barmstrong 16y ago
Interesting, thanks for posting that (it is probably what the author is basing it on)...although it's probably more accurate to call this one theory of how it could happen. The reasoning behind it doesn't fully make sense to me. Simple reason: people spending money as fast as they can (the shot in the arm that can accelerate hyperinflation) has a natural limit: when people have no more savings! So I don't think it's correct to call this a positive feedback loop. It has a natural limit that could be reached quite quickly under hyperinflation. Indexes can only takes things so far too - if you (as a business owner) follow them and nobody can afford your products, you'll quickly figure it out and drop prices. So it seems weird to say indexes could cause hyperinflation over any medium-long time frame.

acqq 16y ago

In Yugoslavia in nineties during the big hyperinflation everybody was calculating the prices in German Marks, still hyperinflation progressed until the specific political decisions happened. I also consider the article as such an oversimplification that the real insight is actually lost.