What Were The Factors That Ended Hyperinflation In Essay

2727 WordsJan 25, 201211 Pages
2. What were the factors that ended hyperinflation in Europe in the 1920s? Can this be explained in terms of the Rational Expectations Hypothesis? The hyperinflation that swept across Germany, Poland, Hungary and Austria between 1922 and 1923 came to an abrupt halt with the implementation of effective and similar economic strategies in each of these 4 countries. This essay will look at what policies were used to end hyperinflation and which of them were particularly successful in putting an end to this period of instability. The essay will then go on to argue that we can understand part of the success of these policies through the Rational Expectations Hypothesis, as proposed by Thomas Sargent. However, this essay will contend, that the theory cannot account for the entire end to this period of hyperinflation, given the real effects on unemployment and output in the 4 respective economies that occurred after the end of hyperinflation. To begin with it is necessary to understand the causes of the hyperinflation. Only upon understanding this can we comprehend how and why this inflation was stabilized. Price levels in these countries reached as high as 1000% a month in Germany[1], whilst in August 1922 gold crown was worth 14,000 times the value of a paper crown. At the time, these high levels of inflation, in the German case in particular were blamed on Balance of Payments issues, and in particular the fact that Germany had to pay large levels of reparations to the victors of World War I. However most studies[2] since then and even classified internal documents from within Germany[3], lay the blame squarely on Fiscal policy and the Central Bank’s willingness to give credit to the government. Before 1923, the budgets of Germany, Poland, Hungary and Austria, were all massively in deficit, caused by a variety of reasons, including poor tax collection, weak

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