Lessons from Zimbabwe_s Hyperinflation and Dollarization_ECO5075

Lessons from Zimbabwe_s Hyperinflation and Dollarization_ECO5075

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Lessons Learned from Zimbabwe’s Hyperinflation and Dollarization Macroeconomic Policy Analysis - 5075 Dr. Mark Ellyne 1 25 August 2015
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Story about Money, Inflation, and the Exchange Rate What is money and How is it created? Zimbabwe’s inflation, exchange rate and Purchasing power parity What happens during hyperinflation? Pros and Cons of Dollarization Optimal Currency Area theory How does money creation work in dollarization Is QE the same type of money creation? 25 August 2015 2
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How High Is Hyperinflation? 25 August 2015 3 Generally: Over 100% annual rate of inflation Cagan’s definition: month-on-month price increases exceeding 50% Hanke & Krus (2012) identify 54 episodes of hyperinflation
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Zimbabwe CPI Inflation (12 month inflation in percent change) 4 25 August 2015
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Zimbabwe Inflation in Context 25 August 2015 5 Country Start date End-date Maximum Monthly Rate--% Hungary Aug 1945 Jul 1946 4.19 x 10 16 Zimbabwe Mar 2007 Nov 2008 7.96 x 10 10 Yugoslavia Apr 1992 Jan 1994 3.13 x 10 8 Republika Srpska Apr 1992 Jan 1994 2.97 x 10 8 Germany Aug 1922 Dec 1923 29,500 Greece May 1941 Dec 1945 13,800 China Oct 1947 May 1945 5,070 Danzig Aug 1922 Oct 1923 2,440 Armenia Oct 1993 Dec 1994 438 Turkmenistan Jan 1992 Nov 1993 429 Source: Hanke, S and Krus, N (2012), World Hyperinflations, Cato Working Paper No 8.
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Geography of 52 Hyperinflations in the last 100 years Source: Steve Hanke and Nicholas Krus, World Hyperinflations – Cato Working Paper (cato.org/research/world- inflation-and-hyperinflation-table) . Washington DC: Cato Institute 2012 25 August 2015 6
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Other Past Hyperinflations Post-war World War I (Germany) Post world war II (Hungary, Greece, China) Latin America – as a result of 1980’s financial liberalization (Peru, Bolivia, Chile, Argentina, Brazil) Former USSR, transition into democracy African cases (Congo Brazzaville & DRC) 25 August 2015 7
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What is the Relationship Between Prices and Money? Thought Experiment Imagine an Island in perfect financial equilibrium; Helicopter doubles the money supply one night; What happens the next day? Output Prices Wealth Distribution 25 August 2015 8
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Money Supply = Balance Sheet of Central Bank + Commercial Banks Assets = Foreign assets (net) CB & Comm banks Credit to government (net) CB & Comm banks Credit to private sector (net) Only Comm banks Other items net Intra banking system Liabilities Notes and coins Demand deposits Time and savings deposits Foreign currency deposits 25 August 2015 9
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How is Money Created? Central bank creates new money when it makes a loan to government or a State Owned Enterprise. The Central bank increases the money supply when it buys foreign exchange from commercial banks. Commercial banks create new money when they lend out deposits. (Multiplier depends on percentage that must be held as reserves.) 25 August 2015 11
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Where Does Money Go?
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