Trace out the events leading to hyperinflation in either Germany from Research Paper

Trace out the events leading to hyperinflation in either Germany from 1922-1923, Hungary 1945-1946, or Zimbabwe from 2007-2008 - Research Paper Example Monetary policy in this case refers to the process by which the monetary authority of a country controls the supply of money through interest rates in order to promote economic growth and stability (Eyler 15). Inflation is a monetary phenomenon which if it intensifies leads to hyperinflation like has been experienced in various countries over the years. Hyperinflation was defined by Cagan in 1956 as a â€Å"price level increase of at least 50% per month (Eppel et al. 33). It begins when monthly inflation rates exceed 50% and ends in the month before the rate falls below 50% and must remain so for at least a year. For example in Zimbabwe, it started in March 2007 and ended when the country abandoned its currency in February 2009. So what causes this hyperinflation despite there being monetary authorities to monitor the monetary policy? This will be the subject our study and the main focus will be on hyperinflation in Zimbabwe from 2007-2008 especially being the first country in twent y-first century to experience inflation and the second in the world hyperinflation record books (Hanke 2013 n.p). Literature Review Hyperinflation as stated earlier is the period beginning when inflation exceeds 50% and ending the month before inflation falls below 50%. Hyperinflation is not a new phenomenon as it began in France during the French revolution in 1795. During this incident the monthly inflation shot up to 143% (Koech 1). Koech also observed that hyperinflation occurred 28 times in the twentieth century especially due to the two world wars and transition from communism to market-based economies. However, Zimbabwe was the first to experience hyperinflation in the twenty-first century. It was also the 30th occurrence and the continent’s second after Congo in the 1991-1994. Hyperinflation is often attributed to wars, political mismanagement, and transition from command to market-based economies. However, no researcher has ever fully documented any case of hyperinfl ation due to difficulties in recording and publication of reliable inflation statistics. Most countries do not record such instances to avoid worsening the situation but Hanke did try to develop a Hyperinflation Index for Zimbabwe (HHIZ) based on market based price data (Hanke n.p). Inflation is regarded as general price level increases in the economy caused by a variety of factors but we shall be concerned with the monetary side of the economy. The monetary policy is used by economies to control money supply and money demand hence economic stability. This entails keeping inflation at the lowest as possible through control of interest rates. Monetary policy can either be expansionary or contractionary. Expansionary policy is aimed at lowering interest rates to attract investments thus combat unemployment during recession while contractionary policy is increasing interest rates hence slow inflation (Carbaugh 396). This is not difficult in a domestic economy. The problem comes in an o pen economy where international transactions are involved. Here, the exchange rate is very vital especially as they are very volatile and also determine balance of payment between nations. The exchange regime in place determines the ability of authorities to control inflation in the country. In a floating exchange