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What is hyperinflation?

Definitions of hyperinflation

Hyperinflation Case Studies

Definitions of hyperinflation

  • Definitions of hyperinflation
  • The Definition of Hyperinflation by Cagan
  • The Definition of Hyperinflation According to the International Accounting Standards Board (IASB)
  • So, how many hyperinflations are there in total?

Definitions of hyperinflation

In this section, we explore the various definitions of hyperinflation, a crucial term in the study of extreme monetary phenomena. The most recognized definition comes from Philip Cagan, who, in his 1956 work, "The Monetary Dynamics of Hyperinflation," proposes a quantitative understanding of hyperinflation. According to Cagan:
  • Beginning and End of Hyperinflation:
    • Hyperinflation begins when monthly inflation exceeds 50%.
    • It ends when the inflation rate falls below 50% per month for at least one year.
To illustrate, if inflation drops to 40% in July and does not rise above 50% until July of the following year, then the period of hyperinflation is considered to have ended in July of the year preceding the year in which it was first observed. This definition enables a precise characterization of hyperinflation episodes, facilitating structured analysis.
This definition has been adopted in the Hanke-Krus table, which documents 56 episodes of hyperinflation. However, the table does not cover all episodes, such as the one in Venezuela in 2016, bringing the total to 57.
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It should be noted that this definition, although precise, could possibly exclude certain episodes of hyperinflation due to the strictness of the 50% threshold. There is a possibility of expanding this definition to include other episodes that, although not strictly meeting Cagan's criteria, nevertheless represent periods of extremely high inflation. This observation opens the door to a broader exploration of hyperinflation phenomena, allowing for a more nuanced understanding of its causes and effects. In subsequent discussions, we will consider revisiting this definition and examining episodes of hyperinflation not covered by Cagan's strict criteria.

The Definition of Hyperinflation by Cagan

Philip Cagan may have set an arbitrary milestone with the 50% monthly inflation threshold when defining hyperinflation. He himself admits that this definition is arbitrary and primarily serves his analysis based on seven episodes of hyperinflation. Examination of Cagan's data reveals that the three episodes of hyperinflation with the lowest monthly inflation rates were around 47%, 46%, and 57%. It appears that the 50% threshold was chosen to encompass these cases in his study.
  • Historical Context: Cagan's definition dates back to 1956 and is based on a limited number of hyperinflation episodes available at that time.
  • Cagan's Observations: According to Cagan, no episode reached this threshold of around 50% without progressing to a more severe hyperinflation, which could justify the choice of this threshold.
  • Critique of Cagan's Definition: Other economists, such as Bernholz, the author of Monetary Regime and Inflation, have also described the 50% threshold as arbitrary. Bernholz notes that there are episodes of high inflation with the same qualitative characteristics as episodes of hyperinflation, without reaching the 50% threshold.
This reflection leads us to question the rigidity of the traditional definition of hyperinflation and highlights the need to perhaps revisit this threshold by incorporating more episodes and historical data. The definition of hyperinflation may require flexibility to encompass various manifestations of extreme inflation in different economic and historical contexts.

The Definition of Hyperinflation According to the International Accounting Standards Board (IASB)

The IASB offers a unique perspective on hyperinflation, focusing on accounting practices during periods of hyperinflation. This approach is crucial for accountants and businesses operating in hyperinflationary environments, where monetary value fluctuates rapidly. The IASB guidelines identify various indicators of hyperinflation:
  • Preference for Non-Monetary Assets:
    Individuals prefer to hold value in goods rather than in currency due to the rapid depreciation of monetary value.
  • Valuation of Goods and Services:
    Residents do not calculate the value of goods and services in local currency, reflecting a loss of confidence in the local currency.
  • Compensation for Monetary Value Loss:
    Prices incorporate compensation for the loss of monetary value during credit purchases, illustrating the impact of inflation on daily transactions.
  • Price, Wage, and Interest Indexation:
    Prices, wages, and interests are adjusted based on an index to compensate for inflation.
  • Cumulative Inflation over Three Years:
    Cumulative inflation over three years approaching 100% (roughly 24% per year), contrasting with Cagan's definition of 50% monthly inflation.
According to IASB criteria, several countries, including Argentina, Ethiopia, Haiti, Iran, Lebanon, Sudan, South Sudan, Suriname, Syria, Turkey, Venezuela, Yemen, and Zimbabwe, are currently experiencing hyperinflation.
This definition provided by the IASB moves away from Cagan's strict quantitative threshold by incorporating a qualitative analysis of economic behaviors and practical adjustments in the face of hyperinflation. It demonstrates that hyperinflation is a complex phenomenon that requires a multidimensional understanding to grasp its real implications, particularly in the field of accounting, which is crucial for the stability and financial transparency of businesses and markets.

So, how many hyperinflations are there in total?

Common definitions of hyperinflation, such as the one proposed by Cagan, stipulating a monthly inflation rate of 50%, can sometimes be confusing or overly simplistic. For example, two countries experiencing annual inflation rates of 1,000% and 3,000% respectively may be perceived differently based on the monthly distribution of that inflation. If no month exceeds the 50% threshold, according to Cagan's definition, those countries would not be classified as in a state of hyperinflation. This approach can thus lead to anomalies in classifying hyperinflation, especially when comparing cumulative inflations over the year.
  • Cagan's work, "Monetary Dynamics of Hyperinflation," provides a fundamental analysis of hyperinflation.
  • Bernholz's book, which studies 30 distinct periods of hyperinflation, thus expanding the scope of analysis.
  • David St-Onge's (the author of this course) personal collection of banknotes from 36 periods of hyperinflation, allowing for a tangible and historical understanding.
  • The Hanky Cross table (2012 version, updated in 2016 with Venezuela), listing 57 periods of hyperinflation based on Cagan's definition.
It is worth noting that certain historical periods of high inflation are not included in the classic tables of hyperinflation, often due to strict classification criteria. For example, during the American War of Independence in November 1779, and during the American Civil War in March 1864, the monthly inflation rates were 47.4% and 40% respectively. These rates, although high, do not exceed the 50% threshold stipulated by Cagan, thus excluding these periods from being classified as hyperinflation cases. This omission highlights the limitations of rigid definitions and underscores the need for a more nuanced understanding of hyperinflation in its full complexity.
Quiz
Quiz1/5
What is the threshold for hyperinflation according to Philip Cagan's definition?