Friday, June 14, 2013

Case Study in Hyperinflation: Venezuela on the Brink

The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.

What is hyperinflation and where does it come from?

Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.

Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now. >>>Read more
The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf
The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf
The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf
The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf

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