Introduction
Hyperinflation in economics is used to refer to a condition whereby there is inflation that is out of control.
Under this condition, the prices of goods increase rapidly while at the same time the currency of the country loses value in comparison to other currencies.
Formally it is used to refer to a situation where the rate of inflation goes beyond 50% every month. Zimbabwe has been experiencing hyperinflation for quite some time now. Another difference between hyperinflation and normal inflation is that while normal inflation is usually recorded every year, hyperinflation is usually recorded on monthly basis.
In economics, the term is sometimes used to refer to an inflationary cycle that does not tend to move towards equilibrium. As a phenomena hyperinflation is characterized by debasement of the coinage, unchecked increase in money supply, and it is closely associated with political and social upheavals, wars, and economic depressions.
Characteristics of hyperinflation
One of the major characteristics of hyperinflation is a situation within the economy whereby the general population chooses to keep their wealth in non-monetary assets or stable foreign currency. During this period the local currency held within the economy is immediately invested to maintain the economy’s purchasing power.
The second characteristic is a situation where the general population regards money, not in terms of the local currency but terms of stable foreign currency. Generally, prices are quoted in foreign currency.
Another characteristic is that during this period Sales and purchases on credit are usually done at prices that will compensate for the anticipated loss of the country’s purchasing power throughout the credit period.
During a period of hyperinflation wages, Interest rates, and prices are fixed to a certain price index.
Causes of hyperinflation
The main cause of hyperinflation is a rapid and massive increase in the money supply. This growth is usually not by a commensurate growth in the output of goods and services. This results in a lack of confidence in the money as well as the monetary system. It is closely related to paper money since it involves the printing of extra banknotes.
Correctional measures
Hyperinflation is usually a threat to economic growth and development. As a result of these different economists and economies as well suggest different correctional measures. Both classical economists and monetarists agree to the fact that hyperinflation is usually a result of irresponsible borrowing by government authorities. Hyperinflation is usually corrected by introducing drastic measures like imposing shock therapy like slashing government expenditure, altering currency basis.
References
Costantino Bresciani. The Economics of Inflation. London: George Allen & Unwin, 1937.
Weatherford, Jack.The History of Money. Three Rivers Press, 1997.
William Guttmann, Gordon & Cremonesi. The Great Inflation, London, 1975.