NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hyperinflation with Currency Substitution: Introducing an Indexed Currency

Federico Sturzenegger

NBER Working Paper No. 4184
Issued in October 1992
NBER Program(s):   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w4184

Published: Journal of Money, Credit and Banking, August 1994

 
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