Currency and Inflation Crises

Fin254f: Spring 2010

Lecture notes 2.2b

Readings: Reinhart and Rogoff(11-12)

Outline

Currency Debasement Inflation crises

Currency Debasement

Dionysius of Syracuse (Greece), 4th century BC

Takes on large debt Gathers all coins Changes units (1->2) on all coins, and uses this to

pay off debt Formally: Reducing silver content in coins

See table 11.1, and also figure 11.2 General move to “fiat” money (no intrinsic

value)

Debasement (more thoughts)

Old strategy/ancient historyMonetary crises go back a long wayQuestion for R+R: Price levels?

Inflation Crises

Figure 12.1 (median inflation rates) Table 12.1 (1500-1799)

Many countries with large inflation Inflation is common

Table 12.2 (1800-2008) Inflation widespread over Africa and Asia Many periods of high inflation

Figure 12.2 (countries with over 20 percent inflation)

Currency Crashes

Higher in early periods Napoleonic wars (1799-1815)

Higher in recent periods tooFigures 12.3-12.4

Aftermath

“Dollarization” (foreign currency) About the same at end as at the peak of

inflation Once people loose confidence hard to shift

back Four dedollarization countries (figure 12.6) Policy: restrictions on foreign currency

deposits

Summary

Inflation crises commonUnstable exchange rates go with thisCurrency loses confidence and

Is taken over “dollarized”Difficult to regain confidence