The Ends of Four Big Inflations

This chapter examines several dramatic historical experiences that are consistent with the “rational expectations” view but that seem difficult to reconcile with the “momentum” model of inflation. The idea is to identify the measures that successfully brought drastic inflations under control in several European countries in the 1920s, namely: Austria, Hungary, Germany, and Poland, all of which experienced a dramatic “hyperinflation” in which, after the passage of several months, price indexes assumed astronomical proportions. The experience of Czechoslovakia is also considered.

Within each of Austria, Hungary, Poland, and Germany, there occurred a dramatic change in the fiscal policy regime, which in each instance was associated with the end of a hyperinflation. Czechoslovakia deliberately adopted a relatively restrictive fiscal policy regime in order to maintain the value of its currency.