The German Hyperinflation (1922-1923) reconsidered: was it really monetary financing?

Event details

Author: Eric Monnet (Paris)

Abstract: The now common view of the causes of German hyperinflation emphasizes the role of monetary financing of the budget deficit. We examine an alternative hypothesis that price increases were driven by exchange rate depreciation, itself caused by Germany’s need to acquire foreign currencies to pay reparations to the Allies. The main trends in macroeconomic series and the interventions of the Reichsbank support this hypothesis. We also show in a theoretical model under what conditions hyperinflation can be caused by exchange rate depreciation, conditions that were mostly verified in Germany in the 1920s. The end of the hyperinflation (through the expropriation of German property to back a new currency) also appears to be a stabilization of the exchange rate consistent with the model. Finally, the study of price data by commodity and by city confirms that the prices of imported goods rose much more during hyperinflation, especially in cities close to the borders (i.e., potentially relying more on imports).

Host: Andrea Papadia (York)

Cluster: Macro-Finance