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Policy Brief 12-22
Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One
by Anders Aslund, Peterson Institute for International Economics
November 2012
Hyperinflation—usually 1,000 percent or more a year—occurs only under very special circumstances: in a disorderly breakup of a currency zone; after wars or revolutions, when monetary or fiscal authorities lack control; and when wild populism prevails. Åslund reviews the historical record and shows that hyperinflation does not arise by mistake but because of major dysfunction or mismanagement. Responsible countries with reasonable governance may default, but they do not have hyperinflation. The danger of hyperinflation, therefore, is an irrelevant concern for ordinary monetary policy. However, the fact that collapse of a large currency union with substantial imbalances usually causes hyperinflation raises concerns for the euro area. Large uncleared payments balances have accumulated between the member countries as the private interbank market has stopped functioning. On the one hand, the uncleared balances have grown massively and, on the other, the creditor countries demand that balances be capped, which would mean disruption of the currency zone. It is critical to prevent a disorderly collapse of the euro area at almost any price, and the most obvious measure is vigorous monetary expansion, even more so than at present. There is no historical evidence of monetary easing or even quantitative easing leading to hyperinflation. The second measure should be more rigorous fiscal austerity in the troubled countries.
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RELATED LINKS
Op-ed: Five Myths about the Euro Crisis September 7, 2012
Article: Why the Euro Will Survive: Completing the Continent's Half-Built House August 22, 2012
Congressional Testimony: Challenges of Europe's Fourfold Union August 1, 2012
Working Paper 12-12: Sovereign Debt Sustainability in Italy and Spain: A Probabilistic Approach August 2012
Policy Brief 12-20: Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups August 2012
Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012
Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012
Book: Resolving the European Debt Crisis March 2012
Policy Brief 12-4: The European Crisis Deepens January 2012
Policy Brief 11-21: What Can and Cannot Be Done about Rating Agencies November 2011
Working Paper 11-2: Too Big to Fail: The Transatlantic Debate January 2011
Policy Brief 10-27: How Europe Can Muddle Through Its Crisis December 2010
Policy Brief 10-14: In Defense of Europe's Grand Bargain June 2010
Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010
Book: The Euro at Ten: The Next Global Currency? July 2009
Op-ed: Europe Must Look East to Deal with the Euro October 11, 2007
Op-ed: Start by Saving the Eurozone October 24, 2008
Speech: The Euro and the World Economy April 27, 2005
Book: The Euro at Five: Ready for a Global Role? April 2005