Working Paper: NBER ID: w24624
Authors: Jose A. Lopez; Kris James Mitchener
Abstract: Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks – and correspondingly high levels of uncertainty – caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border disputes. In contrast, other European countries exhibited lower levels of measured uncertainty between 1919 and 1925, allowing them more capacity with which to implement credible commitments to their fiscal and monetary policies. Impulse response functions show that increased uncertainty caused a rise in inflation contemporaneously and for a few months afterward in GAPH, but this effect was absent or much more limited for the other European countries in our sample. Our results suggest that elevated economic uncertainty directly affected inflation dynamics and the incidence of hyperinflation during the interwar period.
Keywords: hyperinflation; economic uncertainty; inflation dynamics; post-World War I; European economies
JEL Codes: E31; E52; E62; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic policy uncertainty (E69) | inflation (E31) |
| increased uncertainty (D89) | contemporaneous rise in inflation (E31) |
| increased uncertainty (D89) | subsequent rise in inflation (E31) |
| higher levels of uncertainty (D89) | greater inflationary pressures (E31) |
| lower levels of uncertainty (D80) | no influence on inflation dynamics (E31) |