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 history  Monetary crises go back a long way  Question for R+R: Price levels?

Inflation Crises  Figure 12.1 (median inflation rates)  Table 12.1 ( ) Many countries with large inflation Inflation is common  Table 12.2 ( ) 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 ( )  Higher in recent periods too  Figures

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 common  Unstable exchange rates go with this  Currency loses confidence and Is taken over “dollarized”  Difficult to regain confidence