Stabilizing high inflations

Historically, stabilizations that ended episodes of moderate-to-high inflation were often announced in advance of their implementation. I demonstrate that such anticipated stabilization policies can have significant effects on the prestabilization evolution of economic variables. My results provide new insights into debates regarding stabilizations, which traditionally focus only on their post-stabilization consequences.;One example where a stabilization policy seems to play an important role in prestabilization economic behavior is the anomalous second Hungarian hyperinflation. Previously, the severity of this episode was blamed on the government mandated and financed indexation of certain financial assets. In Chapter One I examine the validity of this argument by defining new aggregate measures of money growth and inflation, which take into account the implications of indexation for the composition of central bank liabilities. I show that indexation is responsible for a number of empirical anomalies associated with this hyperinflation, but that it cannot entirely explain the unusual magnitude of the inflation.;In Chapter Two I show how the severity of the second Hungarian hyperinflation can be explained by the nature of its stabilization. I represent the historical features of this episode in a general equilibrium model, incorporating a transition from an inflationary regime to a particular stabilization policy. During the inflation the government finances a fixed deficit with seigniorage revenue. After the stabilization the government budget is balanced and the central bank engages in a program of subsidized lending to the private sector. Stabilization is achieved by targeting a low inflation rate path through adjustments in the quantity of central bank lending. I show that under this stabilization policy (1) the dynamic equilibrium path of the economy is indeterminate and (2) arbitrarily high pre-stabilization inflation rates are possible.;Prior to the 1930's rapid inflations often occurred in conjunction with wartime finance, and were commonly halted by imposing or re-imposing a gold standard. In Chapter Three I use a general equilibrium model to study the consequences of different methods of gold resumption for the dynamic path of the economy, including the behavior of the price level and the welfare of economic agents. I demonstrate that the typical historical pattern of post-war deflation of the fiat currency can arise from anticipations of the stabilization even if the government does not contract the money supply or accumulate gold reserves in preparation for the resumption. In terms of welfare, I find that (1) wartime generations unanimously prefer rapid resumption at high parity, while (2) among postwar generations borrowers and lenders often have opposing interests, but on average they tend to benefit from delaying resumption and devaluing the currency.