## wp18266

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---

### I. Motivation and introduction
- Recent episode highlighted: Venezuela joined the hyperinflation club in November 2017; as of September 2018 year-on-year inflation reached 488,865 percent.
- Study purpose:
  - Revive discussion of empirical regularities of the "hyperinflation cycle".
  - Compare behavior of 62 variables in and out of the cycle.
  - Provide a starting point to observe generalities, not to fully specify causal mechanisms.
- Key empirical indications of where hyperinflation cycles tend to occur:
  - Economies with high presence of natural resource rents and potentially higher State intervention.
  - Diminished economic freedoms (property rights, ease of doing business, economic exchange).
  - Deterioration in socioeconomic conditions: employment and real wages decline.
  - Weakening of rule of law and democratic accountability; increased government instability and greater military presence in political issues.
- Policy- and macro-related correlates coinciding with advent of hyperinflation:
  - High fiscal deficits, initially financed in some cases with external debt and later with seigniorage.
  - Inability to maintain an exchange rate regime.
  - Restrictions on transactions in the financial account of the balance of payments.

### II. Definition and dynamics of the hyperinflation cycle
- Cycle phases (paper’s definitions and thresholds):
  - Phase 1 — Extraordinary acceleration: annual average inflation ≥ 50 percent and < 500 percent.
  - Phase 2 — Hyperinflation: annual average inflation ≥ 500 percent.
  - Phase 3 — Disinflation: annual average inflation < 500 percent and ≥ 50 percent.
  - Phase 4 — Stabilization: annual average inflation < 50 percent and remains below this threshold for a minimum period of five years.
- Duration conventions:
  - Cycle duration counts years inflation remains within thresholds, allowing deviations within each threshold for periods ≤ five years.
- Rationale and probabilistic regularities:
  - Thresholds inspired by Dornbusch and Fischer (1993), Bruno and Easterly (1995), Fischer et al. (2002).
  - From Fischer, Sahay and Végh transition matrix: when annual inflation > 400 percent, probability of remaining >400 is 67.6 percent; when annual inflation < 50 percent, probability of reduction or maintenance is 84.9 percent.
  - Total observations in the transition matrix: 3,857.

### III. Counts, regional distribution and representative statistics
- Modern hyperinflation cycles:
  - 19 hyperinflation cycles found in 19 countries.
  - Regional breakdown:
    - Western Hemisphere: 6 countries — Argentina, Bolivia, Brazil, Chile, Nicaragua and Peru.
    - Commonwealth of Independent States: 6 countries — Armenia, Azerbaijan, Belarus, Kazakhstan, Russia and Ukraine.
    - Europe: 3 countries — Bulgaria, Croatia and Poland.
    - Africa: 3 countries — Angola, Democratic Republic of the Congo (Zaire) and Zimbabwe.
    - Asia and the Pacific: 1 country — Indonesia.
- Average and median cycle statistics:
  - Average duration: 16-17 years.
  - Annual average inflation (average across cycles): 893 percent.
  - Median duration: 14 years.
  - Median annual inflation: 45 percent.
- Extreme per-country representative figures (exact values preserved from Table 2 excerpts):
  - Angola: Initial Year 1991, Final Year 2008, Duration 18, Cumulative 10,892, Average Annual Inflation 605, Maximum Average Annual Inflation 4,145.
  - Congo’s Dem. Rep.: Initial Year 1976, Final Year 2006, Duration 31, Cumulative 35,497, Average Annual Inflation 1,145, Maximum Average Annual Inflation 23,773.
  - Zimbabwe: 1999–2013, Duration 15, Cumulative 27,404, Average Annual Inflation 1,827, Maximum 24,411.
  - Indonesia: 1960–1973, Duration 14, Cumulative 2,187, Average Annual Inflation 156, Maximum 1,136.
  - Argentina: 1972–1996, Duration 25, Cumulative 9,467, Average Annual Inflation 379, Maximum 3,080.
  - Bolivia: 1982–1991, Duration 10, Cumulative 13,791, Average Annual Inflation 1,379, Maximum 11,750.
  - Brazil: 1981–2000, Duration 20, Cumulative 11,631, Average Annual Inflation 582, Maximum 2,948.
  - Nicaragua: 1985–1996, Duration 12, Cumulative 27,292, Average Annual Inflation 2,274, Maximum 10,205.
  - Perú: 1978–1997, Duration 20, Cumulative 13,006, Average Annual Inflation 650, Maximum 7,482.
  - Longest cycle: 31 years in the Democratic Republic of the Congo; second longest: 25 years in Argentina.

### IV. Phase structure and phase-specific averages (stylized facts)
- Phase durations and inflation medians/averages:
  - Phase 1 (Acceleration/Incubation):
    - Average duration 8-9 years; annual average inflation 125 percent; median duration 8 years; median annual inflation 96 percent.
    - Six countries jumped directly to ≥500 percent (skipping Phase 1), primarily CIS economies.
  - Phase 2 (Hyperinflation/Explosive):
    - Average duration 3-4 years; average annual inflation 2,912 percent; median duration 4 years; median annual inflation 1,330 percent.
  - Phase 3 (Disinflation):
    - Average duration 3-4 years; average annual inflation 195 percent; median duration 6 years; median annual inflation 171 percent.
    - Three countries skipped Phase 3 (Nicaragua, Bulgaria, Zimbabwe).
  - Phase 4 (Stabilization):
    - Average duration 5-6 years; average annual inflation 15 percent; median duration 5 years; median annual inflation 13 percent.
    - By five years after start of disinflation, most countries kept inflation below 50 percent.
- Stylized timeline summary:
  - Relatively long incubation period: 8-9 years.
  - Short explosive phase: 2-3 years (Phase 2 described as the shortest).
  - Disinflation typically shorter than incubation: 3-4 years.
  - Stabilization generally achieved within five years of disinflation start for most countries.
- Regional patterns:
  - Shorter cycles: Commonwealth of Independent States (CIS).
  - Longest cycles and highest accumulated rates: Africa and Latin America.
  - Highest average rates: Latin America; lowest in the Commonwealth of Independent States.

### V. Data and empirical approach
- Dataset and scope:
  - Median of 62 variables estimated for four phases, two stages (rise and fall), and complete cycle for two samples: 19 hyperinflation episodes and a control group (rest of countries).
- Statistical test and inference:
  - Confidence interval test for the Hodges-Lehmann median difference (1963), a special case of the average slope of Theil (1950), discussed by Sen (1968).
  - Intervals calculated with robust variances considering grouping by countries; Newson (2000) referenced for methodology.
  - Results presented in Tables 7 to 13 and Figures 1 to 5; statistical significance evaluated at 1, 5 and 10 percent levels (***, **, * respectively).

### VI. Empirical regularities — Fiscal and monetary factors
- Sample median for government's fiscal balance (% GDP): -1.9 percent.
- Fiscal balance (Hodges-Lehman median differences vs. rest of sample):
  - Stage 1 (rise): median fiscal balance about 3.1 percentage points lower (significant at 1 percent).
  - Stage 2 (fall): median fiscal balance 1.5 percentage points higher (significant at 1 percent).
  - Whole cycle: fiscal result 0.5 percentage points higher than rest of sample (not statistically significant).
- Base money (% change) — proxy for seigniorage (Hodges-Lehman median differences, significance preserved):
  - Phase 1 Acceleration: Base Money 52.6***.
  - Phase 2 Hyperinflation: Base Money 241.7***.
  - Phase 3 Disinflation: Base Money 60.5***.
  - Phase 4 Stabilization: Base Money 18.1***.
  - Stage 1 Rise: Base Money 91.6***.
  - Stage 2 Fall: Base Money 24.3***.
  - Cycle: Base Money 44.3***.
  - Median value of entire sample (base money growth): 13.2 percent.
  - Interpretation: extraordinary growth of base money is present across all phases; seigniorage expansion is an invariable feature of hyperinflation cycles.
- Tax revenues (% GDP):
  - Stage 1: lower by 3.6 percentage points relative to rest of sample.
  - Whole cycle: representative hyperinflation country collects -2.9 percentage points less in tax revenues than representative country of the sample.
  - Table 7 entries:
    - Phase 1 Acceleration: -2.4*.
    - Phase 2 Hyperinflation: -5.2*.
    - Phase 3 Disinflation: -2.6.
    - Phase 4 Stabilization: -2.9*.
    - Stage 1 Rise: -3.6**.
    - Stage 2 Fall: -2.5.
    - Cycle: -2.9*.
- Central Government Debt (% GDP) — selected Table 7 entries:
  - Phase 1: 242*** (large positive median difference).
  - Other entries include: 67.6, -1.1, 1.9, 67.8, -1.3, 10.9.

### VII. Empirical regularities — External factors and external accounts
- Key Hodges-Lehman median differences (selected exact values from Table 8):
  - VIX Index (% change): Phase 1 -0.2; Phase 2 -2.5***; Stage1 Rise -1.6***; Cycle 0.
  - United States real interest rate (%): Phase 1 2.8***; Stage1 Rise 1.9***; Cycle 0.5.
  - Natural resource rent (% GDP): Cycle 1.6*; Stage2 Fall 1.4*.
  - Share of products subject to tariffs (%): Phase 1 4.2***.
  - Average applied tariff (% of total tradable products): Phase 2 6.9*; Phase 3 2.9***; Phase 4 2.8**; Cycle 3*.
  - Export volume (% change): Phase 4 2.2**; Stage2 Fall 3**; Cycle 2*.
  - Import volume (% change): Phase 1 -5.7**; Stage2 Fall 4.5***.
  - Export price - relative to US (Index, 2010 = 100): Cycle -0.2***; Stage1 Rise -0.2***; Stage2 Fall -0.2***.
  - External debt interest payments (% Exports): Phase 1 11***; Stage1 Rise 7.3***; Cycle 2.4.
  - FDI, net inflows (% GDP): Phase 1 -1.2***; Phase 2 -0.9***; Cycle -0.4**.
  - International Reserves, flow (% GDP): Phase 1 -4***; Phase 2 -3.6***; Cycle -1.4**.
  - International Reserves, stock (% GDP): Phase 1 -4.5***; Phase 2 -5.5***; Cycle -3.7***.
- Interpretations and highlights:
  - Export price differences statistically significant but small in magnitude (e.g., -0.2 percentage points).
  - VIX not different during full cycle; Stage 1 shows lower volatility (VIX -1.6***).
  - U.S. real interest rate higher by up to 2.8 percentage points in Phase 1 (significant at 1 percent).
  - Trade-restriction measures and applied tariffs higher in key phases.
  - External debt service burden rises during rise stage and regularizes during stabilization.
  - FDI inflows lower in the rise stage; financial account and reserve flows show significant net losses.
- Synthesis:
  - Variables that differ significantly are frequently associated with economic policy (fiscal deficits, capital controls, exchange rate regime, economic freedoms) rather than exogenous external shocks per se.

### VIII. Real and financial sector impacts
- Real economy medians and significance (selected exact Hodges-Lehman median differences from Table 9):
  - GDP growth (% change): Phase 1 -3.8***; Phase 2 -7.2***; Phase 4 1.2*; Cycle -1.9***.
  - GDP growth, per capita (% change): Phase 1 -4***; Phase 2 -7.1***; Phase 4 2.1***; Cycle -1.6**.
  - GDP, per capita (USD 2010): Phase 1 -549.4**; Phase 2 -442.1**; Phase 3 -622***; Cycle -417**.
  - Real consumption (% change): Phase 1 -2.9***; Phase 2 -10.5**; Phase 4 1.3**.
  - Real Gross Fixed Capital Investment (% change): Phase 1 -6.1***; Phase 2 -5.4*; Phase 4 4.2**.
  - Real effective exchange rate (Index, 2010 = 100): Cycle -13.2.
- Investment and savings (% GDP):
  - Gross Fixed Capital Investment (% GDP): Phase 1 -5.6*; Phase 3 -4.1**; Phase 4 -4.5***; Cycle -4.3***.
  - Gross national saving (% GDP): Phase 2 -4.9*; Phase 4 -6.5**; Cycle -5.1***.
- Financial sector (selected):
  - Bank credit to the private sector (% GDP): Phase 1 -11**; Phase 2 -13.2***; Cycle -13.3***.
  - Bank deposits (% GDP): Phase 1 -11.1***; Phase 2 -15.7***; Cycle -14.8***.
- Interpretation:
  - Hyperinflation cycles associate with large declines in GDP growth, consumption, investment, bank credit and deposits; investment and savings as percent of GDP are typically 4-5 percentage points lower.

### IX. Exchange rate policy, structural factors and governance
- Exchange regime and nominal depreciation:
  - Itzenski et al. exchange regime index: median value of exchange regime for whole cycle is 6 positions higher than rest of sample (1 percent).
  - Nominal official exchange rate (% change) Hodges-Lehman median differences:
    - Phase 1: 52.6***.
    - Phase 2: 246.9***.
    - Phase 3: 66.6***.
    - Phase 4: 6.3***.
    - Stage1 Rise: 94.4***.
    - Stage2 Fall: 11.7***.
    - Cycle: 39.8***.
  - Interpretation: substantial nominal depreciation and movement toward more flexible/volatile regimes during rise and hyperinflation phases.
- Financial account openness and capital controls:
  - Financial account openness (Chinn and Ito index): Cycle -0.7***; Stage1 Rise -1***; Stage2 Fall -0.5.
  - Median value of the depreciation rate of the nominal exchange rate in the entire sample is 0; during the cycle much larger.
  - Policy implication: tightening financial-account controls in rise stage often accompanies net capital outflows; relaxing controls in fall stage associated with improved capital flows.
- Economic Freedom and governance indices (selected Hodges-Lehman median differences):
  - Economic Freedom (Index, 0 to 100): Phase 1 -18.1***; Phase 2 -25.5***; Cycle -15.9***.
  - Property rights (Index, 0 to 100): Cycle -10.
  - Freedom from corruption (Index, 0 to 100): Cycle -11***.
  - Monetary freedom (Index, 0 to 100): Cycle -56.9***.
  - Trade freedom (Index, 0 to 100): Cycle -13.4***.
  - Socioeconomic conditions (Index, 0 to 12): Cycle -2.5***.
  - Democratic accountability (Index, 0 to 6): Cycle -1.5***.
  - Government stability (Index, 0 to 12): Cycle -1*.
  - Military in politics (Index, 0 to 6): Cycle -1*.
  - Internal conflict (Index, 0 to 12): Cycle -2**.
- Interpretation:
  - Economic freedoms and governance indicators deteriorate significantly during hyperinflation cycles; exchange regime management loosens/commoditizes into free-fall or parallel market dynamics.

### X. Multilateral assistance (IMF programs): prevalence and associated differences
- Prevalence:
  - In 18 of the 19 hyperinflation cycles a program of financial assistance with the IMF was implemented; Angola did not request assistance.
  - Presence by phase:
    - Phase 1: 51 percent of cases.
    - Phase 2: absence of programs in 66 percent of cases.
    - Phase 4: presence of programs in 67 percent of cases.
  - Stage-level presence statements in text vary (e.g., first stage 45 percent; second stage 62 percent) — both sets of percentages reported in the source.
- Duration examples:
  - Democratic Republic of the Congo: 12 years (7 in phase 1, rest in phase 4).
  - Argentina: 12 years (starting one year before phase 2 until end of cycle).
  - Zimbabwe: 2 years (only at beginning of phase 1).
  - Chile and Brazil: 3 years (only in phases 2 and 3).
- Hodges-Lehman median differences comparing years with IMF assistance vs. without (selected exact figures):
  - Complete cycle: base money growth lower by -29.2; nominal exchange rate depreciation lower by -34.3 percentage points.
  - Phase 1: base money (% change) -9; current account (% GDP) 4.1**; financial account (% GDP) 3.8**; economic freedom 13.3***.
  - Phase 2: base money (% change) -82.8*; nominal official exchange rate (% change) -88.7**; rent from natural resources (% GDP) -9.8**; external debt interest payments (% Exports) 13*.
  - Phase 3: FDI, net inflows (% GDP) 1.2**.
  - Phase 4: base money (% change) -9.6**; fiscal balance (% GDP) -2.7**.
- Interpreted effects:
  - Programs associated with lower base money growth, smaller exchange rate variation, greater burden of external debt payments to exports, and greater economic freedoms in this sample.
  - No significant differences observed in economic growth, exchange rate regime, and foreign investment flows.
  - Conclusion: IMF programs correlate with greater fiscal flexibility and lower monetary growth in this sample, but program design requires country-specific tailoring.

### XI. Within-country (rise vs. fall) differences (selected significant medians)
- Hodges-Lehman median differences (Rise vs. Fall) with significance preserved:
  - Fiscal Balance (% GDP): -4,4***.
  - Base Money (% change): 67,9***.
  - Central Government Debt (% GDP): 92,5**.
  - VIX Index: -2,5*.
  - United States real interest rate (%): 2,2***.
  - Import volume (% change): -7,4**.
  - External debt interest payments (% Exports): 6,8**.
  - FDI, net inflows (% GDP): -1,3***.
  - International Reserves, flows (% GDP): -3,6***.
  - International Reserves, stock (% GDP): -2,3***.
  - GDP growth (% change): -5,6***.
  - GDP growth, per capita (% change): -6,7***.
  - Real consumption expenditure, public sector (% change): -5***.
  - Gross Fixed Capital Formation (% change): -8,3***.
  - Nominal official exchange rate (% change): 75***.
  - Exchange rate regime (change): 6**.
  - Economic freedom (Index, 0 a 100): -8,4**.
  - Government stability (Index, 0 a 12): -3***.
- Summary interpretation:
  - Rise stage characterized by large increases in base money, massive depreciation, worse fiscal balances, contractions in imports and investment, lower GDP and per-capita growth, lower public consumption and investment, lower economic freedoms, and greater government instability.
  - Fall stage shows partial symmetry and recovery on many variables.

### XII. Conclusions and policy-relevant findings
- Conditions associated with onset of hyperinflation cycles:
  - High natural resource rents and higher State intervention.
  - Substantially reduced economic freedoms (ease of doing business, trade, labor market rigidities).
  - Domestic policy drivers: high fiscal deficits (external debt first, seigniorage later), inability to maintain an exchange rate regime, and restrictions on financial-account transactions.
  - Socioeconomic deterioration, weakening of rule of law and democratic accountability, greater government instability and military influence.
- What happens during hyperinflation (Phase 2):
  - Base money grows exorbitantly; international reserves decline greatly; aggregate demand collapses; financial sector contracts; currency loses almost all value; social/political conditions and economic freedoms hit lowest levels.
- Conditions associated with the end of hyperinflation cycles:
  - Improvements on three fronts:
    - Fiscal and monetary mix: fiscal accounts nearer equilibrium and strong decreases in base money growth.
    - External sector interaction: reduced trade barriers, improved export/import capacity, regularized burden of foreign debt on exports, cessation of extreme devaluation and lower FX variability.
    - Structural factors: increased economic freedoms and greater government stability.
- Role of multilateral assistance:
  - Programs associated with lower base money growth, smaller exchange rate variation, greater burden of foreign debt payments to exports, and greater economic freedoms; no clear differences in growth or foreign investment.
  - Policy implication: program design must be tailored to country specifics (“the ‘tailored suit’ applies the most”).
- Research questions for further work (as posed in the source):
  - Why no substantive evidence of hyperinflation between 1947 and 1984?
  - Institutional and political commonalities among hyperinflation countries?
  - True impact of external factors on hyperinflations?
  - Deeper effects on the financial system beyond balance sheets?
  - Detailed behavior of labor markets and role of parallel markets?
  - Why do countries with IMF assistance appear to have more fiscal flexibility?

*Source: wp18266 (excerpt provided).*

### References .............................................................................................................

### wp18266 - References

### I. MOTIVATION AND INTRODUCTION
- Recent episode: Venezuela joined the hyperinflation club in November 2017; as of September 2018 year-on-year inflation reached 488,865 percent.
- Hyperinflation coincided with a massive contraction of economic activity that began prior to hyperinflation.
- Severe social impacts noted: increased poverty indexes, resurgence of eradicated diseases, and highest recorded worldwide emigration in 2017 and 2018 (United Nations); ENCOVI indicates worsening social conditions.
- Purpose of the study:
  - Revive discussion of empirical regularities of the "hyperinflation cycle".
  - Compare behavior of a long list of economic variables (62 variables) in and out of the cycle.
  - Provide a starting point to observe generalities, not to fully specify causal mechanisms among variables.
- Key empirical indications of where hyperinflation cycles tend to occur:
  - Economies with high presence of natural resource rents and potentially higher State intervention.
  - Diminished economic freedoms, especially property rights and ease of doing business and economic exchange.
  - Deterioration in socioeconomic conditions: employment and real wages decline.
  - Weakening of rule of law and democratic accountability; increased government instability and greater military presence in political issues.
- Policy- and macro-related correlates coinciding with advent of hyperinflation:
  - High fiscal deficits, initially financed in some cases with external debt and later with seigniorage.
  - Inability to maintain an exchange rate regime.
  - Restrictions on transactions in the financial account of the balance of payments.
- Conditions associated with the end of hyperinflation cycles (improvements on three fronts):
  - Fiscal and monetary mix: fiscal accounts closer to equilibrium and base money growth decreases substantially.
  - Interaction with external sector: barriers to international trade diminish; exp/imp capacity increases; burden of foreign debt on exports regularizes; devaluation of the currency is stopped; less variability of the foreign exchange rate.
  - Structural factors: increases in economic freedoms and improvements in government stability and quality.
- Paper structure (sections noted): literature and challenges; definition and dynamics of hyperinflation cycle; data and methodology; empirical findings; conclusions; references and appendix.

### II. THE CHALLENGES OF STUDYING HYPERINFLATION
- Rarity and heterogeneity:
  - Hyperinflation is uncommon; Fischer, Sahay and Végh (2002) show no hyperinflations in 1947-1984 and only 13 countries experienced hyperinflation from 1984-1996.
  - From 1984-1996 example breakdown: four Latin American (Argentina, Bolivia, Brazil, Nicaragua), two African (Angola, Democratic Republic of the Congo), six transition economies (Armenia, Azerbaijan, Georgia, Tajikistan, Turkmenistan, Serbia and Ukraine).
  - Since 1996 occurrence minimal: only 3 countries registered hyperinflation in the last 20 years referenced: Bulgaria (1997, using Cagan), Zimbabwe (2007) and Venezuela (2017, using Fischer et. al. criterion).
  - If episodes shorter than two months are included, the modern-era list rises to 25 (per Fischer et. al. discussion).
- Statistical and data limitations:
  - Small-sample inference and unobserved heterogeneity challenge standard regression methods due to short duration and low occurrence.
  - Lack of availability of high-frequency data for many key variables: inflation monthly, but fiscal/external/structural/policy variables often annual.
  - Aggregation/disaggregation across frequencies reduces accuracy and can bias estimates.
- Definition variability:
  - Multiple definitions in literature produce different case identification:
    - Cagan (1956): hyperinflation begins when monthly inflation exceeds 50 percent and ends when monthly inflation is less than 50 percent for at least one year.
    - Fischer et. al adjusted definition excludes episodes shorter than two months.
    - International Accounting Standards Board: hyperinflation when a rate of 100 percent is recorded for three consecutive years.
    - Reinhart and Rogoff (2011): threshold of annual rate of 500 percent for modern hyperinflations.
  - Choice of definition contains arbitrariness; different criteria reflect different empirical focuses.
- Methodological approach of current work:
  - Incorporates new variables and uses non-parametric methods to reduce biases and be accessible to non-specialized audiences.

### III. STYLIZED FACTS: THE DYNAMICS OF THE HYPERINFLATION CYCLE
- Definition and phases of the hyperinflation cycle as used in this paper:
  - Cycle comprises two major stages (rise and fall), each split into two sub-periods, totaling 4 phases:
    1. Extraordinary acceleration phase (path towards hyperinflation): period in which the annual average inflation rate is higher or equal to 50 percent, but less than 500 percent.
    2. Hyperinflation phase: period in which annual average inflation is greater than or equal to 500 percent.
    3. Disinflation phase: period in which annual average inflation is less than 500 percent, but greater than or equal to 50 percent.
    4. Stabilization phase: period in which annual average inflation falls below 50 percent and remains below this threshold for a minimum period of five years.
  - Duration of a hyperinflation cycle is the number of years inflation remains within these thresholds, allowing deviations (gaps) within each threshold for periods less than or equal to five years.
- Rationale for threshold selection:
  - Thresholds 50 percent and 500 percent inspired by methodologies in Dornbusch and Fischer (1993), Bruno and Easterly (1995), and Fischer et. al (2002).
  - The extraordinary acceleration phase term justified by Fischer et. al finding: once annual inflation exceeds 50 percent, the probability of it falling or remaining the following year is significantly less than half (33.6 percent); once inflation exceeds 400 percent a year, probability that it continues to increase is higher (text indicates continuation but exact probability beyond 400 percent noted by Fischer et. al).
- Study objectives tied to cycle analysis:
  - Identify conditions under which hyperinflation episodes begin.
  - Describe what happens during episodes.
  - Identify conditions under which episodes probably end.
  - Propose what authorities could do to increase probability of successful disinflation.

*wp18266 - References.*

### 67.6 percent. On the other hand, when annual inflation is less than 50 percent, the probability

### wp18266 - 67.6 percent. On the other hand, when annual inflation is less than 50 percent, the probability

### Inflation transition matrix and key probability finding
- Fischer, Sahay and Vegh’s Market Economies Inflation Transition Matrix (Table 1) highlights:
  - When annual inflation is greater than 400 percent, the probability of remaining >400 is 67.6 percent.
  - When annual inflation is less than 50 percent, the probability that it is reduced or maintained is 84.9 percent.
- Total observations in the matrix: 3,857.

### Modern hyperinflation cycles: counts and regional distribution (Table 2)
- 19 hyperinflation cycles found in 19 countries.
- Regional breakdown:
  - Western Hemisphere: 6 countries — Argentina, Bolivia, Brazil, Chile, Nicaragua and Peru.
  - Commonwealth of Independent States: 6 countries — Armenia, Azerbaijan, Belarus, Kazakhstan, Russia and Ukraine.
  - Europe: 3 countries — Bulgaria, Croatia and Poland.
  - Africa: 3 countries — Angola, Democratic Republic of the Congo (Zaire) and Zimbabwe.
  - Asia and the Pacific: 1 country — Indonesia.

- Average cycle statistics:
  - Average duration: 16-17 years.
  - Annual average inflation (average across cycles): 893 percent.
  - Median duration: 14 years.
  - Median annual inflation: 45 percent.
- Longest and shortest cycles:
  - Longest: 31 years in the Democratic Republic of the Congo.
  - Second longest: 25 years in Argentina.
  - Shorter cycles (6-8 years) mainly in economies in transition (CIS).

- Representative per-country figures from Table 2 (selected exact values):
  - Angola: Initial Year 1991, Final Year 2008, Duration 18, Cumulative 10,892, Average Annual Inflation 605, Maximum Average Annual Inflation 4,145.
  - Congo’s Dem. Rep.: Initial Year 1976, Final Year 2006, Duration 31, Cumulative 35,497, Average Annual Inflation 1,145, Maximum Average Annual Inflation 23,773.
  - Zimbabwe: 1999–2013, Duration 15, Cumulative 27,404, Average Annual Inflation 1,827, Maximum 24,411.
  - Indonesia: 1960–1973, Duration 14, Cumulative 2,187, Average Annual Inflation 156, Maximum 1,136.
  - Argentina: 1972–1996, Duration 25, Cumulative 9,467, Average Annual Inflation 379, Maximum 3,080.
  - Bolivia: 1982–1991, Duration 10, Cumulative 13,791, Average Annual Inflation 1,379, Maximum 11,750.
  - Brazil: 1981–2000, Duration 20, Cumulative 11,631, Average Annual Inflation 582, Maximum 2,948.
  - Nicaragua: 1985–1996, Duration 12, Cumulative 27,292, Average Annual Inflation 2,274, Maximum 10,205.
  - Perú: 1978–1997, Duration 20, Cumulative 13,006, Average Annual Inflation 650, Maximum 7,482.
  - (Full Table 2 contains all 19 country entries and exact numbers.)

### Phase structure and phase-specific averages
- Overall cycle decomposition:
  - Phase 1 (Acceleration/Incubation): average duration 8-9 years, annual average inflation 125 percent; median duration 8 years; median annual inflation 96 percent.
    - Notable: 6 countries did not have Phase 1 (jump from <50 percent to ≥500 percent in one year) — primarily CIS economies.
    - Longest Phase 1: Congo’s Dem. Rep. 15 years; Argentina 12 years.
    - Shortest Phase 1: Angola, Azerbaijan, Bolivia, Chile (1-2 years); Croatia 3 years; Indonesia 6 years.
  - Phase 2 (Hyperinflation/Explosive phase): average duration 3-4 years, average annual inflation 2,912 percent; median duration 4 years; median annual inflation 1,330 percent.
    - Longest Phase 2: Argentina and Brazil (7 years), Nicaragua (6 years).
    - Shortest Phase 2: Armenia, Bulgaria, Chile, Indonesia, Kazakhstan, Poland, Russia (1-2 years); Azerbaijan, Bolivia, Ukraine (2-3 years).
  - Phase 3 (Disinflation): average duration 3-4 years, average annual inflation 195 percent; median duration 6 years; median annual inflation 171 percent.
    - Longest Phase 3: Angola (7 years); Belarus, Congo’s Dem. Rep., Russia (6 years).
    - Shortest Phase 3: Argentina, Bolivia, Brazil, Croatia, Kazakhstan, Poland (0-1 year); Indonesia, Peru, Ukraine (1-2 years).
    - Three countries skipped Phase 3 (went from ≥500 percent to <50 percent in less than one year): Nicaragua, Bulgaria, Zimbabwe.
  - Phase 4 (Stabilization): average duration 5-6 years, average annual inflation 15 percent; median duration 5 years; median annual inflation 13 percent.
    - Longest Phase 4: Congo’s Dem. Rep. and Russia (9 years).
    - By five years after start of disinflation, most countries kept inflation below 50 percent; especially Bulgaria, Nicaragua and Zimbabwe.

- Phase-specific tables:
  - Table 3: Phase 1 country-by-country durations and inflation statistics (exact values for each listed country).
  - Table 4: Phase 2 country-by-country durations and inflation statistics (exact values for each listed country).
  - Table 5: Phase 3 country-by-country durations and inflation statistics (exact values for each listed country).
  - Table 6: Phase 4 country-by-country durations and inflation statistics (exact values for each listed country).

### Summary of cycle dynamics
- Stylized average timeline:
  - Relatively long incubation period: 8-9 years.
  - Relatively short explosive phase: 2-3 years (Phase 2 described as the shortest phase).
  - Disinflation period generally half the incubation period: 3-4 years.
  - Almost all countries stabilized prices five years after inflation fell below the 50 percent threshold.
- Regional patterns:
  - Shorter cycles: Commonwealth of Independent States.
  - Longest cycles and highest accumulated rates: Africa and Latin America.
  - Highest average rates: Latin America; lowest in the Commonwealth of Independent States.

### Data, methodology and empirical approach (Sections IV and V opening)
- Dataset and approach:
  - Median of 62 variables estimated for four phases, two stages (rise and fall), and complete cycle for two samples: 19 hyperinflation episodes and a control group (rest of countries).
  - Statistical test: confidence interval test for the Hodges-Lehmann median difference (1963), a special case of the average slope of Theil (1950), discussed by Sen (1968); intervals calculated with robust variances considering grouping by countries; reference to Newson (2000) for methodology details.
  - Tables 7 to 13 and Figures 1 to 5 present results; statistical significance evaluated at 1, 5 and 10 percent levels (represented as ***, **, * respectively).

### Empirical regularities — Fiscal and monetary factors (Table 7 and Figure 1)
- Sample median for government's fiscal balance (% GDP): -1.9 percent.
  - Controlling for hyperinflation:
    - Stage 1 (rise): median fiscal balance about 3.1 percentage points lower than in countries without hyperinflation (significant at 1 percent).
    - Stage 2 (fall): median fiscal balance 1.5 percentage points higher than in countries without hyperinflation (significant at 1 percent).
  - For the whole cycle: fiscal result 0.5 percentage points higher than in rest of sample (not statistically significant).
- Base money (% change) (proxy for seigniorage):
  - Stage 1: Hodges-Lehman median difference 52.6***.
  - Stage 2: 241.7***.
  - Phase and stage summary entries from Table 7 (exact values):
    - Phase 1 Acceleration: Base Money 52.6***.
    - Phase 2 Hyperinflation: Base Money 241.7***.
    - Phase 3 Disinflation: Base Money 60.5***.
    - Phase 4 Stabilization: Base Money 18.1***.
    - Stage 1 Rise: Base Money 91.6***.
    - Stage 2 Fall: Base Money 24.3***.
    - Cycle: Base Money 44.3***.
  - Median value of entire sample (base money growth): 13.2 percent.
  - Conclusion: extraordinary growth of base money is present across all phases; seigniorage expansion is an invariable feature of hyperinflation cycles.
- Tax revenues (% GDP):
  - Stage 1: lower by 3.6 percentage points relative to rest of sample (stage-level note in text).
  - Whole cycle: representative hyperinflation country collects -2.9 percentage points less in tax revenues than representative country of the sample.
  - Table 7 entries (Hodges-Lehman median differences, significance exactly preserved):
    - Phase 1 Acceleration: -2.4*.
    - Phase 2 Hyperinflation: -5.2*.
    - Phase 3 Disinflation: -2.6.
    - Phase 4 Stabilization: -2.9*.
    - Stage 1 Rise: -3.6**.
    - Stage 2 Fall: -2.5.
    - Cycle: -2.9*.
- Central Government Debt (% GDP):
  - Table 7 entries include a large positive median difference in Phase 1: 242***.
  - Other phase and stage entries: 67.6, -1.1, 1.9, 67.8, -1.3, 10.9 (exact values preserved).

- Interpretation:
  - Results align with literature linking fiscal deficits, seigniorage and inflation.
  - Tax erosion during hyperinflation consistent with Keynes-Olivera-Tanzi effect.

### Empirical regularities — External factors (Table 8)
- Variables and key Hodges-Lehman median differences (exact table excerpts and significance):
  - VIX Index (% change): Phase 1 -0.2; Phase 2 -2.5***; Phase 3 1; Phase 4 0.3; Stage1 Rise -1.6***; Stage2 Fall 0.4; Cycle 0.
  - United States real interest rate (%): Phase 1 2.8***; Phase 2 0.6; Phase 3 -0.1; Phase 4 -0.5; Stage1 Rise 1.9***; Stage2 Fall -0.3; Cycle 0.5.
  - Natural resource rent (% GDP): Phase 1 1.7; Phase 2 1.7; Phase 3 3.3; Phase 4 1.1; Stage1 Rise 1.7; Stage2 Fall 1.4*; Cycle 1.6*.
  - Share of products subject to tariffs (%): Phase 1 4.2***; Phase 2 -0.1; Phase 3 0; Phase 4 0; Stage1 Rise 1.3; Stage2 Fall 0; Cycle 0.
  - Average applied tariff (% of total tradable products): Phase 1 2; Phase 2 6.9*; Phase 3 2.9***; Phase 4 2.8**; Stage1 Rise 3.1; Stage2 Fall 2.9**; Cycle 3*.
  - Current account (% GDP): Phase 1 0.5; Phase 2 0.2; Phase 3 -0.5; Phase 4 -1.6; Stage1 Rise 0.4; Stage2 Fall -1.5; Cycle -0.8.
  - Export volume (% change): Phase 1 -1.1; Phase 2 2.6; Phase 3 1.6; Phase 4 2.2**; Stage1 Rise 0; Stage2 Fall 3**; Cycle 2*.
  - Import volume (% change): Phase 1 -5.7**; Phase 2 0.7; Phase 3 4.4; Phase 4 2.5; Stage1 Rise -3; Stage2 Fall 4.5***; Cycle 1.8.
  - Export price - relative to US (Index, 2010 = 100): Phase 1 (blank), Phase 2 -0.2, Phase 3 -0.3***, Phase 4 -0.3***, Stage1 Rise -0.2***, Stage2 Fall -0.2***, Cycle -0.2***.
  - Import price - relative to US (Index, 2010 = 100): Phase 1 (blank), Phase 2 0.1, Phase 3 -0.1, Phase 4 -0.1*, Stage1 Rise 0, Stage2 Fall -0.1*, Cycle -0.1.
  - External debt interest payments (% Exports): Phase 1 11***; Phase 2 4; Phase 3 -0.6; Phase 4 1.2; Stage1 Rise 7.3***; Stage2 Fall 0.6; Cycle 2.4.
  - Financial account (% GDP): Phase 1 -0.2; Phase 2 0.1; Phase 3 -1.1; Phase 4 -2; Stage1 Rise 0; Stage2 Fall -1.8; Cycle -1.2.
  - FDI, net inflows (% GDP): Phase 1 -1.2***; Phase 2 -0.9***; Phase 3 -0.2; Phase 4 0.5; Stage1 Rise -1.1***; Stage2 Fall 0.3; Cycle -0.4**.
  - FDI, net outflows (% GDP): Phase 1 -0.2***; Phase 2 -0.2***; Phase 3 -0.1***; Phase 4 -0.1*; Stage1 Rise -0.2***; Stage2 Fall -0.1***; Cycle -0.1***.
  - Portfolio investment (% GDP): all entries 0 except Phase 4 -0.1 (exactly as table).
  - International Reserves, flow (% GDP): Phase 1 -4***; Phase 2 -3.6***; Phase 3 -1.4**; Phase 4 0.1; Stage1 Rise -3.8***; Stage2 Fall -0.2; Cycle -1.4**.
  - International Reserves, stock (% GDP): Phase 1 -4.5***; Phase 2 -5.5***; Phase 3 -5.4***; Phase 4 -1.9*; Stage1 Rise -4.9***; Stage2 Fall -2.7***; Cycle -3.7***.

- Interpretation and highlights from the text:
  - Export price differences are statistically significant at 1 percent but marginal in magnitude (-0.2 percentage points); impact appears limited.
  - VIX index median not different during full cycle; during Stage 1 volatility is 1.6 percent lower than elsewhere (suggesting hyperinflation can develop despite relative capital market stability).
  - U.S. real interest rate higher by up to 2 percentage points in Stage 1 (significant at 1 percent), implying higher borrowing costs could be important.
  - Trade restrictions: proportion of products subject to tariffs is up to three percentage points higher during Stage 2 (significant at 5 percent).
  - Current account (% GDP): no statistically significant median differences at traditional confidence levels across the cycle; signs and magnitudes vary across countries.

*Source: Author’s calculations and tables as presented in the supplied content.*

### 0.4 percentage points higher than the rest of the sample. In the second stage, it is

### wp18266 - 0.4 percentage points higher than the rest of the sample. In the second stage, it is

### External factors, external accounts and external debt service
- External prices are somewhat lower during the cycle; possible implications include:
  - lower imports (both by reductions in economic activity and/ or restrictions —foreign and domestic— to the capital account)
  - lower volume of exports
  - lower (or greater) payments of external debt and less repatriation of dividends
  - falls in current transfers
- Import behavior:
  - import prices: no significant differences
  - import volumes: in the first phase, the growth rate of imports is 5.7 percentage points lower; during the second stage, it is higher by 4.5 percentage points (at the 5 percent level)
- Export volumes:
  - export volumes: a positive difference of 3 percentage points is observed in the second stage of the cycle (at the 5 percent level)
  - interpretation: deterioration and subsequent recovery of absorption and export capacity during the cycle
- External debt interest payments (interest payments on foreign debt as a percentage of total exports of goods, services and net factor payments):
  - during the rise stage: 11 percentage points higher (significant at 1 percent level)
  - during the fall stage (beginning of disinflation, phase 3): 0.6 percentage points lower than the rest of the sample (not statistically significant)
  - dynamic: increase significantly when domestic prices rise, then fall when disinflation begins, then regularize during stabilization
  - implication: increases in public spending based on increases in external debt can alter future allocation of resources, reduce imports, increase seigniorage, crowd out private sector, raise borrowing costs, exacerbate economic deterioration and reinforce exponential domestic price increases
  - amplification: effects likely larger in economies with high natural resource dependency and strong state presence (examples in text: Angola, the Democratic Republic of the Congo, some Commonwealth countries, Russia, Bolivia, and Chile)
- Financial account and capital flows:
  - median financial account balance as percent of GDP: 1.8 percentage points lower during the hyperinflation cycle (not statistically significant overall)
  - stage breakdown: difference small in first stage (between 0 and -0.2 percentage points), substantial in second stage (between -1 and -1.8 percentage points)
  - FDI flows: 0.5 points of GDP lower during the cycle (-0.4 for incoming flows and -0.1 for outgoing flows), at 1 percent level
    - lower FDI flows greater in the first stage than in the second (suggests greater inflow once inflation begins to fall and stabilize)
  - portfolio investment: median value not significantly different from rest of sample in each of four phases
  - international reserve flows as proportion of GDP: median value lower by 3.6 points (at the 1 percent level)
- Synthesis: lower current and financial account balances during the cycle mainly due to:
  - (i) greater burden of external debt service as a percentage of exports
  - (ii) lower FDI inflows
  - (iii) lower cash flows, lower commercial and financial loans
  - (iv) net losses of international reserves
- Overall inference: exogenous external factors (terms of trade shocks, international financial market volatility) are not very different during the hyperinflation cycle, though external interest rates seem important; variables that differ significantly are associated with economic policy: high fiscal deficits, intervention on current and capital account transactions, the exchange rate regime, basic economic freedoms

*Sources: World Bank, IMF, St. Louis FED, and Author's calculations.*

### Hyperinflation and the real and financial sectors — empirical medians and significance (Table 9 summary)
- Key median differences across phases (Hodges-Lehman Median Differences). Significance notation: *, **, *** for 10, 5, 1 percent respectively.
- Real economy performance:
  - GDP growth (% change): -3.8*** (Phase 1 Acceleration), -7.2*** (Phase 2 Hyperinflation), -3.2 (Phase 3 Disinflation), 1.2* (Phase 4 Stabilization), Stage1 Rise: -5***, Stage2 Fall: 0.6, Cycle: -1.9***
  - GDP growth, per capita (% change): -4***, -7.1***, -3, 2.1***, Stage1: -5.2***, Stage2: 1.3*, Cycle: -1.6**
  - GDP, per capita (USD 2010): -549.4**, -442.1**, -622***, -242.9, Stage1: -490.8**, Stage2: -343.1*, Cycle: -417**
  - Real consumption (% change): -2.9***, -10.5**, -4.4***, 1.3**, Stage1: -3.9***, Stage2: -0.3, Cycle: -0.7
  - Real consumption, public sector (% change): n.a., -3.9**, 0.2, 1.3*, Stage1: -3***, Stage2: 1.5*, Cycle: 0
  - Real consumption, private sector (% change): n.a., -4.6**, -0.9, -0.7, Stage1: -2.9*, Stage2: -0.9, Cycle: -1.5*
  - Real Gross Fixed Capital Investment (% change): -6.1***, -5.4*, -5, 4.2**, Stage1: -6.3***, Stage2: 3.2**, Cycle: -0.9
  - Real Gross Fixed Capital Investment, public sector (% change): n.a., 3.5, -3.6, 1.2, Stage1: 3.5, Stage2: 1.8, Cycle: 2
  - Real Gross Fixed Capital Investment, private sector (% change): n.a., 5.5, 5.6, 2.3, Stage1: 5.5, Stage2: 4.6, Cycle: 4.8
  - Inventories (% change): -4, 2.8, -7.2, 4.5, Stage1: -0.8, Stage2: 1.6, Cycle: 0.5
  - Real effective exchange rate (Index, 2010 = 100): -36***, -3.4, -6.4, -9.9, Stage1: -20.4, Stage2: -9.1, Cycle: -13.2
- Investment and savings as percent of GDP:
  - Gross Fixed Capital Investment (% GDP): -5.6*, -2.8, -4.1**, -4.5***, Stage1: -4.2*, Stage2: -4.2***, Cycle: -4.3***
  - Gross Fixed Capital Investment, private sector (% GDP): -4.3**, 0.7, 0.7, -0.6, Stage1: -2.3, Stage2: 0, Cycle: -1
  - Gross national saving (% GDP): -2, -4.9*, -4.4, -6.5**, Stage1: -3.4*, Stage2: -5.9***, Cycle: -5.1***
- Financial sector performance:
  - Bank credit to the private sector (% GDP): -11**, -13.2***, -17.9***, -12.6***, Stage1: -11.7***, Stage2: -14.2***, Cycle: -13.3***
  - Bank deposits (% GDP): -11.1***, -15.7***, -18.2***, -14.4***, Stage1: -13***, Stage2: -15.7***, Cycle: -14.8***
- Interpretation highlights:
  - Median of real GDP growth, real GDP growth per capita, and GDP per capita (constant dollars) is lower during the entire hyperinflation cycle (at least at the 5 percent level)
  - Public consumption contracts by 1.5 percentage points (at the 10 percent level)
  - Real exchange rate median lower by 13.2 percentage points (suggests real depreciation) though not statistically significant
  - Investment and household savings as proportion of real GDP are between 4 and 5 percentage points lower than rest of sample (at the 1 percent level)
  - Financial sector: credit to private sector as percent of GDP is 13.3 percentage points lower; bank deposits/GDP lower by 14.8 percentage points (both at 1 percent confidence) — consistent with literature that hyperinflations contract the financial system

*Sources: World Bank, IMF and Author’s calculations.*

### Exchange rate policy, structural factors and governance indices (Table 10 summary)
- Variables grouped into exchange rate policy (exchange rate regime, financial account openness, nominal exchange rate depreciation) and structural changes (Economic Freedom indices, ICRG country risk indicators, IMF program access)
- Exchange regime dynamics:
  - Itzenski et al. Index scale: 1 to 15 (first levels more pegged; highest levels float freely, depreciate in free fall or dual exchange rate with parallel markets)
  - Median value of exchange regime index for whole cycle: 6 positions higher than rest of sample (at 1 percent level)
  - Stage 1: median increases 10 positions; Stage 2: increases 3 positions (both at 1 percent level)
  - During first 3 phases, median becomes between 9 and 10 positions “more flexible” than rest of sample; during stabilization phase index is one position higher (not statistically significant)
  - Median value of exchange regime for whole sample: 4 (de facto peg)
  - Interpretation: first stage sees shift from fixed regime to free fall and/or dual market; stabilization stage returns to less fluctuation/more stability — suggests capacity, willingness and credibility losses in exchange rate management during cycle, possibly due to controls on foreign currency transactions and capital financing restrictions
- Nominal exchange rate depreciation:
  - For whole cycle: median depreciation rate of official nominal exchange rate is almost 40 percentage points higher than rest of sample (significant at 1 percent)
  - Stage 1: depreciation rate is 94.5 percentage points higher than rest of sample
- Table 10 Hodges-Lehman median differences (selected entries; significance *, **, *** for 10, 5, 1 percent):
  - Nominal official exchange rate (% change): 52.6*** (Phase 1 Acceleration), 246.9*** (Phase 2 Hyperinflation), 66.6*** (Phase 3 Disinflation), 6.3*** (Phase 4 Stabilization), Stage1 Rise: 94.4***, Stage2 Fall: 11.7***, Cycle: 39.8***
  - Exchange rate regime: 10***, 9***, 9***, 1, Stage1: 10***, Stage2: 3***, Cycle: 6***
  - Financial account openness (Index, from -2 to 2): -0.8***, -1.1***, -0.8***, -0.1, Stage1: -1***, Stage2: -0.5, Cycle: -0.7***
  - Economic Freedom (Index, from 0 to 100): -18.1***, -25.5***, -20.2***, -12.8***, Stage1: -21***, Stage2: -14.7***, Cycle: -15.9***
  - Property rights (Index, from 0 to 100): -20**, -20, -10, -10, Stage1: -20, Stage2: -10, Cycle: -10
  - Freedom from corruption (Index, from 0 to 100): -4**, -17***, -20***, -8**, Stage1: -8**, Stage2: -11***, Cycle: -11***
  - Fiscal freedom (Index, from 0 to 100): -13.3***, -17.3***, -15.3***, -1.9, Stage1: -14.3***, Stage2: -5, Cycle: -6.6**
  - Monetary freedom (Index, from 0 to 100): -41.2***, -74.5***, -71.7***, -38.3***, Stage1: -50.8***, Stage2: -58.1***, Cycle: -56.9***
  - Trade freedom (Index, from 0 to 100): -13.6**, -21***, -18.2***, -12***, Stage1: -16.4***, Stage2: -12.8***, Cycle: -13.4***
  - Investment freedom (Index, from 0 to 100): -30, -20**, -20, -20, Stage1: -20, Stage2: -20, Cycle: -20
  - Socioeconomic conditions (Index, from 0 to 12): -1.5, -3***, -3.5***, -2***, Stage1: -2***, Stage2: -2.5***, Cycle: -2.5***
  - Bureaucratic quality (Index, from 0 to 4): -1, -1, -1***, -1***, Stage1: -1, Stage2: -1***, Cycle: -1**
  - Rule of law (Index, from 0 to 6): -1, -2***, -1**, -0.5, Stage1: -1.5**, Stage2: -1, Cycle: -1*
  - Democratic accountability (Index, from 0 to 6): -1.5*, -1.5**, -2***, -1**, Stage1: -1.5**, Stage2: -1***, Cycle: -1.5***
  - Government stability (Index, from 0 to 12): -2**, -4***, 0, 0.5, Stage1: -3***, Stage2: 0, Cycle: -1*
  - Military in politics (Index, from 0 to 6): -1, -2**, -2**, -1, Stage1: -1.5**, Stage2: -1, Cycle: -1*
  - Internal conflict (Index, from 0 to 12): -2.5, -4**, -3***, -0.5, Stage1: -3**, Stage2: -1*, Cycle: -2**
  - Ethnic tensions (Index, from 0 to 6): 0, -1, -2**, 0, Stage1: -1, Stage2: -0.5, Cycle: -1
- Interpretation:
  - Exchange regime becomes significantly more flexible/volatile during the rise and hyperinflation phases; nominal official exchange rate depreciation is substantially larger during the cycle
  - Financial account openness declines (index moves negative), and multiple economic freedom indices and governance indicators deteriorate significantly during hyperinflation episodes
  - These results reinforce the characterization of an unsustainable macroeconomic policy mix during hyperinflation, accompanied by weakened exchange rate management, reduced financial openness, and declines in institutional and structural metrics

*Sources: World Bank, IMF, Heritage Foundation, ICRG and Author’s calculations.*

### 11.7 percentage points, both at 1 percent confidence (the median value of the depreciation

### wp18266 - 11.7 percentage points, both at 1 percent confidence (the median value of the depreciation

### Exchange rate policy, capital controls, and external sector dynamics
- Median value of the depreciation rate of the nominal exchange rate in the entire sample is 0.
- Chinn and Ito capital control index (range -2 to 2; negative = greater restrictions):
  - Median value decreases by 0.7 during the hyperinflation cycle, at 1 percent level.
  - In the rise stage, the difference increases to -0.9, at 1 percent.
  - In the fall stage it decreases 0.5 points (difference not statistically significant).
  - Median value of the index for the whole sample is -0.1; median value for the entire sample in another place is stated as zero (text notes both).
- Interpretation:
  - During the rise stage, countries adopt a stricter stance towards capital flows; in the fall stage controls “return to normal.”
  - Negative sign of the financial account for the entire cycle suggests:
    - (i) tighter controls do not reverse net negative financial account balances in the first stage (net capital outflows persist); and
    - (ii) relaxation in the second stage worsens the net negative balance (net capital outflows increase).
- Policy implication drawn: tightening financial-account controls can be counterproductive in hyperinflation contexts, exacerbating external constraints, pressures on the nominal exchange rate, and seigniorage; relaxing controls is associated with lower pressure on the nominal exchange rate, less seigniorage, and greater (absolute) capital inflows.
- Empirical summary: exchange rate regime tends to accommodate price increases; capital controls exacerbate effects of other policy variables.

### Structural variables, economic freedoms, and political/institutional conditions
- Economic Freedom Index (range 0 to 100; higher = greater freedom):
  - Median value across the hyperinflation cycle is 16 points lower than the rest of the sample, at 1 percent confidence.
  - In the first stage (rise) the index is lower by 21.1 points, at 1 percent confidence.
  - In the second stage (fall) the index is lower by 14.8 points, at 1 percent confidence.
- Components with significant deterioration (at stated confidence levels):
  - Freedoms to do business, labor, and exchange: decrease significantly at 1 percent.
  - Fiscal freedom: deteriorates at 5 percent.
  - Monetary freedom: deteriorates at 1 percent.
  - Freedom from corruption: deteriorates at 1 percent.
- Institutional and political indicators deteriorating during the hyperinflation cycle:
  - Socioeconomic conditions (index including unemployment, consumer confidence, poverty): statistically significant deterioration.
  - Democratic accountability: deterioration at 1 percent confidence.
  - Quality of institutions: deterioration at 5 percent.
  - Rule of law: deterioration at 10 percent.
  - Government instability: greater instability at 10 percent.
  - Internal conflicts: greater internal conflicts at 5 percent.
  - Greater presence of the military in government at 5 percent.
- Sample note: only 3 of 19 hyperinflation countries have Economic Freedom data coinciding with hyperinflation (index starts in 1995), but the median value for all countries that have had hyperinflation is up to 16 points lower than the representative value for the rest of the sample.

### Multilateral assistance (IMF programs): prevalence, duration, and associated differences
- Prevalence:
  - In 18 of the 19 hyperinflation cycles a program of financial assistance with the IMF was implemented; Angola did not request assistance.
  - Presence of a program by phase:
    - Phase 1 (first stage / on the road to hyperinflation): 51 percent of cases.
    - Phase 2 (hyperinflation): absence of programs in 66 percent of cases.
    - Phase 4 (stabilization): presence of programs in 67 percent of cases.
  - In the first stage presence observed in 45 percent of cases; in the second stage presence observed in 62 percent of cases (text gives both sets of percentages in different sentences).
- Longest users of assistance:
  - Democratic Republic of the Congo: 12 years (7 in phase 1, rest in phase 4).
  - Argentina: 12 years (starting one year before phase 2, until end of cycle).
- Shortest users:
  - Zimbabwe: 2 years (only at beginning of phase 1).
  - Chile and Brazil: 3 years (only in phases 2 and 3).
- Hodges-Lehman median differences comparing years with IMF assistance vs. without (selected, cycle-level and stage-level highlights — preserve numeric signs and precision):
  - Complete cycle: base money growth lower by -29.2; nominal exchange rate depreciation lower by -34.3 percentage points.
  - Phase 1 (Acceleration / Rise): fiscal balance (% GDP) -2.4; base money (% change) -9; current account (% GDP) 4.1**; financial account (% GDP) 3.8**; economic freedom (Index, 0 a 100) 13.3***.
  - Phase 2 (Hyperinflation): base money (% change) -82.8*; nominal official exchange rate (% change) -88.7**; rent from natural resources (% GDP) -9.8**; external debt interest payments (% Exports) 13*.
  - Phase 3 (Disinflation): base money (% change) -4.6; fiscal balance (% GDP) 0.8; FDI, net inflows (% GDP) 1.2**.
  - Phase 4 (Stabilization): fiscal balance (% GDP) -2.7**; base money (% change) -9.6**.
  - Stage comparisons and cycle aggregates in Table 12 include many variables with significance markers (*, **, ***) where presented.
- Interpreted effects of IMF assistance (statistically relevant patterns):
  - More fiscal flexibility, lower growth of base money, less variation in the nominal exchange rate, greater burden of external debt on exports, and greater economic freedoms in countries that had assistance.
  - In the fall stage (stage 2 / disinflation/stabilization): lower growth of imports, lower growth of public consumption, and greater economic freedoms also stand out.
  - No differences observed in exchange regime or flows of foreign direct investment.
- Final textual point: at both stages of the cycle, the economic freedom index was higher for the representative country that went to the IMF.

### Within-country (rise vs. fall) differences (statistically significant median differences)
- Selected Hodges-Lehman median differences (Rise vs. Fall) with significance:
  - Fiscal Balance (% GDP): -4,4***.
  - Base Money (% change): 67,9***.
  - Central Government Debt (% GDP): 92,5**.
  - VIX Index: -2,5*.
  - United States real interest rate (%): 2,2***.
  - Import volume (% change): -7,4**.
  - External debt interest payments (% Exports): 6,8**.
  - FDI, net inflows (% GDP): -1,3***.
  - International Reserves, flows (% GDP): -3,6***.
  - International Reserves, stock (% GDP): -2,3***.
  - GDP growth (% change): -5,6***.
  - GDP growth, per capita (% change): -6,7***.
  - Real consumption expenditure, public sector (% change): -5***.
  - Gross Fixed Capital Formation (% change): -8,3***.
  - Nominal official exchange rate (% change): 75***.
  - Exchange rate regime (change): 6**.
  - Economic freedom (Index, 0 a 100): -8,4**.
  - Government stability (Index, 0 a 12): -3***.
- Summary interpretation:
  - Rise stage characterized by large increases in base money, massive depreciation, worse fiscal balances, contractions in imports and investment, lower GDP growth and per-capita growth, lower public consumption and investment, lower economic freedoms, and greater government instability.
  - Fall stage shows symmetry: lower depreciation, more stable exchange rate regime, some recovery of variables.

### Conclusions and policy-relevant findings
- Conditions associated with the onset of hyperinflation cycles:
  - High presence of natural resource rents and potentially higher State intervention.
  - Substantially reduced economic freedoms (ease of doing business, trade, labor market rigidities).
  - Domestic policy drivers: high fiscal deficits (financed by external debt initially and by seigniorage later), inability to maintain an exchange rate regime, and restrictions on financial-account transactions.
  - Socioeconomic deterioration: employment and real wages fall; rule of law and democratic accountability weaken; government instability and military influence increase.
- What happens during hyperinflation (phase 2):
  - Base money grows exorbitantly, international reserves decline greatly, aggregate demand collapses, financial sector contracts, currency loses almost all value, social/political conditions and economic freedoms hit lowest recorded levels, while external factors may appear better relative to previous phase.
- Conditions associated with the end of hyperinflation cycles:
  - Improvements on three fronts:
    - (a) Fiscal and monetary mix: fiscal accounts nearer equilibrium and strong decreases in base money growth.
    - (b) External sector interaction: reduced trade barriers, improved export/import capacity, regularized burden of foreign debt on exports, cessation of extreme devaluation and lower FX variability.
    - (c) Structural factors: increased economic freedoms and greater government stability.
- Role of multilateral assistance:
  - Representative evidence: programs associated with lower base money growth, smaller exchange rate variation, greater burden of foreign debt payments to exports, and greater economic freedoms.
  - No significant differences observed in economic growth, exchange rate regime, and foreign investment flows.
  - Conclusion: IMF programs appear correlated with greater fiscal flexibility and lower monetary growth in this sample, but program design requires country-specific tailoring (“the ‘tailored suit’ applies the most”).
- Research questions proposed for further work (as posed in the source):
  - Why no substantive evidence of hyperinflation between 1947 and 1984?
  - Institutional and political commonalities among hyperinflation countries?
  - True impact of external factors on hyperinflations?
  - Deeper effects on the financial system beyond balance sheets?
  - Detailed behavior of labor markets and role of parallel markets?
  - Why do countries with IMF assistance appear to have more fiscal flexibility?

*Source: wp18266 (excerpt provided).*

### APPENDIX I. DATA

### APPENDIX I. DATA

### Fiscal and Monetary
- Inflation (%) — World Bank  
  - The inflation measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that can be fixed or changed at specific intervals, such as annually. The Laspeyres formula is generally used.
- Fiscal Balance (% GDP) — World Bank  
  - The net lending (+) / net borrowing (-) is equal to the government's income less the expenses, minus net investment in non-financial assets. It is also equal to the net result of transactions in financial assets and liabilities. Net lending / net borrowing is a summary measure that indicates the extent to which the government makes financial resources available to other sectors of the economy or abroad, or uses the financial resources generated by other sectors of the economy or abroad.
- Base Money (% change) — IMF  
  - Annual percentage change in the monetary base or base money, which is defined in general terms as the currency in circulation outside the central bank, the net holdings of deposits of other deposit societies in the central bank and the rest of the sectors of the economy that are also included in money in a broad sense.
- Tax Revenue (% GDP) — World Bank  
  - Tax revenues refer to compulsory transfers to the central government for public purposes divided by GDP. Certain mandatory transfers are excluded, such as fines, penalties and most social security contributions. Reimbursements and corrections of tax revenues wrongly collected are treated as negative income.
- Central Government Debt (% GDP) — World Bank  
  - The debt is the entire stock of direct contractual obligations of the government to others at a given date. It includes domestic and foreign obligations such as deposits of money and cash, securities other than shares and loans. It is the gross amount of government liabilities reduced by the amount of capital and financial derivatives that the government owns. Because debt is a stock rather than a flow, it is measured from a certain date, usually the last day of the fiscal year.

### External
- VIX Index (% change) — St. Luis FED  
  - Implied volatility index of the put options market in Chicago, United States.
- Unites States real interest rate (%) — St. Luis FED  
  - It is obtained by deflating the short-term Libor rate (less than 1 year). The US annual GDP deflator is used as the adjustment variable.
- Natural resource rent (% GDP) — World Bank  
  - Total rents of natural resources are the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents and forest rents, divided by GDP.
- Share of products subject to tariffs (%) — World Bank  
  - The proportion of tariff lines with specific rates in the proportion of lines in the tariff list that are established per unit or that combine the ad valorem and per unit rates. It shows the extent to which countries use tariffs based on physical quantities or other non-ad valorem measures.
- Applied tariff (% of total tradable products) — World Bank  
  - The weighted average applied rate is the average of the rates applied, weighted by the parts of the imports of products corresponding to each partner country. The data is classified using the Harmonized System of Commerce at the level of six or eight digits. The data of the tariff line was compared with revision 3 codes of the International Classification of International Trade to define the commodity groups and the import weights. As far as possible, the specific rates have been converted to their ad valorem equivalent rates and have been included in the calculation of the weighted averages. The weightings of imports were calculated using the Commodity Trade (Comtrade) database of the United Nations Statistics Division. The tariff rates effectively applied at the six- and eight-digit product level are averaged for the products in each product group. When the rate applied is not available, the most favored nation rate is used instead.
- Current account (% GDP) — World Bank  
  - The balance of the current account is the sum of net exports of goods and services, net primary income and net secondary income.
- Export volume (% change) — IMF  
  - Annual percentage change in exports of goods and services based on constant local currencies. Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transportation, travel, royalties, license fees and other services, such as communication, construction, financial, information, commercial, personal and governmental services. Exclude employee compensation and investment income (formerly called factor services) and transfer payments.
- Import volume (% change) — IMF  
  - Annual percentage change in imports of goods and services based on constant local currencies Imports of goods and services represent the value of all goods and other market services received from the rest of the world. They include the value of merchandise, freight, insurance, transportation, travel, royalties, license fees and other services, such as communication, construction, financial, information, commercial, personal and governmental services. Exclude employee compensation and investment income (formerly called factor services) and transfer payments.
- Export price - relative to US (Index, 2010 = 100) — IMF and author’s calcs.  
  - Exports price index relative to that of the United States, normalized to 100 in the year 2010.
- Import price - relative to US (Index, 2010 = 100) — IMF and author’s calcs.  
  - Imports price index relative to that of the United States, normalized to 100 in the year 2010.
- External debt interest payments (% Exports) — World Bank  
  - Total payments of interest on exports of goods, services and primary income. The total payment of interest is the sum of the interest paid in cash, goods or services on the long-term debt, interest paid on the short-term debt and charges to the IMF.
- Financial account (% GDP) — World Bank  
  - The net financial account shows the acquisition and net disposal of financial assets and liabilities. It measures how the net lending or borrowing of non-residents is financed and is conceptually equal to the sum of the balances of the current and capital accounts. The data is in current U.S. dollars.
- FDI, net inflows (% GDP) — World Bank  
  - Direct foreign investment is the net investment flows to acquire a long-term management interest (10% or more of the shares with voting rights) in a company that operates in an economy different from that of the investor. It is the sum of social capital, the reinvestment of profits, other long-term capital and short-term capital, as shown in the balance of payments. This series shows net inflows (new investment flows minus divestment) in the reporting economy of foreign investors and is divided by GDP.
- FDI, net outflows (% GDP) — World Bank  
  - Foreign direct investment refers to direct investment capital flows in an economy. It is the sum of social capital, reinvestment of profits and other capital. Direct investment is a category of cross-border investment associated with a resident in an economy that has control or a significant degree of influence in the management of a company that resides in another economy. The ownership of 10 percent or more of the common shares of voting shares is the criterion to determine the existence of a direct investment relationship. This series shows the net outflows of investment from the reporting economy to the rest of the world and is divided by GDP.
- Portfolio investment (% GDP) — World Bank  
  - Portfolio investment covers transactions in equity securities and debt securities. The data are in current U.S. dollars, divided by GDP in local currency adjusted by the average exchange rate for the year.
- International Reserves, flow (% GDP) — World Bank  
  - Reserves and related items are the net changes in a country's holdings of international reserves as a result of transactions in current, capital and financial accounts. Reserve assets are those external assets readily available and controlled by the monetary authorities to meet the balance of payments financing needs, and include monetary gold holdings, special drawing rights (SDR), reserve position in the IMF and other reserve assets. Also included are IMF loans and net loans (excluding the reserve position) and exceptional total financing. The data are in current U.S. dollars and divided by GDP transformed into U.S. dollars using the average official exchange rate for the corresponding year. For some countries where the official exchange rate does not reflect the rate actually applied to real currency transactions, an alternative conversion factor is used.
- International Reserves, stock (% GDP) — World Bank  
  - Total reserves include holdings of monetary gold, special drawing rights, reserves of IMF members held by the IMF and holdings of currencies under the control of the monetary authorities. The gold component of these reserves is valued at the end of London prices (December 31). The data are in current U.S. dollars and are divided by the GDP transformed into US dollars using the average official exchange rate of the corresponding year. For some countries where the official exchange rate does not reflect the rate actually applied to real currency transactions, an alternative conversion factor is used.

### Real and Financial
- GDP growth (% change) — IMF  
  - Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant U.S. dollars of 2010. GDP is the sum of the gross added value of all producers’ resident in the economy plus any tax on the product and less any subsidy not included in the value of the products. It is calculated without making deductions for the depreciation of manufactured assets or for the depletion and degradation of natural resources.
- GDP growth, per capita (% change) — IMF  
  - GDP per capita is the gross domestic product divided by the mid-year population.
- GDP, per capita (USD 2010) — IMF and author’s calcs.  
  - Gross Domestic Product in real terms normalized to U.S. dollars for the year 2010. For some countries where the official exchange rate does not reflect the rate actually applied to real currency transactions, an alternative conversion factor is used.
- Real consumption (% change) — IMF  
  - Annual percentage change based on constant local currency. The final consumption expenditure (before total consumption) is the sum of final consumption expenditure of households (private consumption) and final consumption expenditure of general government (general government consumption). This estimate includes any statistical discrepancy in the use of resources in relation to the supply of resources.
- Real consumption, public sector (% change) — IMF  
  - Annual percentage change based on constant local currency. The final consumption expenditure of the general government (previously, general government consumption) includes all current government expenditures for purchases of goods and services (including compensation of employees). It also includes the majority of defense and national security expenditures but excludes government military expenditures that are part of the government's capital formation.
- Real consumption, private sector (% change) — IMF  
  - Annual percentage change based on constant local currency. Household final consumption expenditure (formerly private consumption) is the market value of all goods and services, including durable products (such as automobiles, washing machines and home computers), acquired by households. It excludes the purchase of houses but includes the imputed rent for the dwellings occupied by their owners. It also includes payments and fees to governments to obtain permits and licenses. Here, household consumption expenditure includes the expenses of non-profit institutions that serve households, even when the country reports separately. This element also includes any statistical discrepancy in the use of resources in relation to the supply of resources.
- Gross Fixed Capital Investment (% change) — IMF  
  - Annual percentage change based on constant local currency. Gross fixed capital formation (formerly known as fixed gross domestic investment) includes land improvements (fences, ditches, drains, etc.); purchases of plants, machinery and equipment; and the construction of roads, railways and the like, including schools, offices, hospitals, private homes and commercial and industrial buildings. According to the 1993 SNA, net acquisitions of valuables are also considered capital formation.
- Gross Fixed Capital Investment, public sector (% change) — IMF  
  - Annual percentage change based on constant local currency. Public investment covers the gross disbursements of the public sector (including military spending) in additions to its fixed domestic assets.
- Gross Fixed Capital Investment, private sector (% change) — IMF  
  - Annual percentage change based on constant local currency. Private investment covers gross disbursements from the private sector (including private non-profit agencies) in additions to their fixed domestic assets.
- Inventories (% change) — IMF  
  - Annual percentage change based on constant local currency. They are the value of the entries in the inventories minus the value of the withdrawals, and less the value of any recurring loss of assets in the inventories.
- Real effective exchange rate (Index, 2010 = 100) — World Bank  
  - The real effective exchange rate is the nominal effective exchange rate (a measure of the value of a currency versus a weighted average of several foreign currencies) divided by a price deflator or a cost index.
- Bank credit to the private sector (% GDP) — World Bank  
  - Domestic credit to the private sector refers to financial resources provided to the private sector by financial corporations, such as loans, purchases of securities other than investment and commercial loans and other accounts receivable, which establish a claim for refund. For some countries these claims include credit to public companies. Financial corporations include monetary authorities and money deposit banks, as well as other financial corporations where data is available (including companies that do not accept transferable deposits but incur liabilities such as savings and time deposits). Examples of other financial corporations are financial and leasing companies, money lenders, insurance companies, pension funds and currency companies.
- Bank Deposits (% GDP) — World Bank  
  - It is the sum of sight deposits and term deposits, both in national currency and in foreign currency divided by GDP.
- Gross Fixed Capital Investment (% GDP) — World Bank  
  - Gross fixed capital formation (formerly known as fixed gross domestic investment) includes land improvements (fences, ditches, drains, etc.); purchases of plants, machinery and equipment; and the construction of roads, railways and the like, including schools, offices, hospitals, private homes and commercial and industrial buildings. According to the 1993 SNA, net acquisitions of valuables are also considered capital formation.
- Gross Fixed Capital Investment, private sector (% GDP) — World Bank  
  - Private investment covers gross disbursements from the private sector (including private non-profit agencies) in additions to their fixed domestic assets.
- Gross national saving (% GDP) — World Bank  
  - Gross national savings are calculated as gross national income less total consumption, plus net transfers, divided by GDP.

### Other Economic Policy and Structural
- Nominal official exchange rate (% change) — World Bank  
  - The official exchange rate refers to the exchange rate determined by the national authorities or to the rate determined in the exchange market legally sanctioned. It is calculated as an annual average based on the monthly averages (units of local currency in relation to the US dollar).
- Exchange rate regime — Itzenski, Reinhart and Rogoff  
  - The Itzenski index, et. al moves a scale of 1 to 15, being:  
    - 1 There is no legal tender or monetary union.  
    - 2 Pre-set peg or conversion box.  
    - 3 Pre-announced horizontal band that is narrower or equal to +/- 2%.  
    - 4 De facto crawling peg.  
    - 5 Crawling peg previously announced; de facto mobile band narrower than or equal to +/- 1%.  
    - 6 Crawling band previously announced that is narrower or equal to +/- 2%. or de facto horizontal band that is narrower or equal to +/- 2%.  
    - 7 Crawling peg.  
    - 8 De facto crawling band that is narrower or equal to +/- 2%.  
    - 9 Crawling band previously announced that is greater than or equal to +/- 2%.  
    - 10 De facto crawling band that is narrower or equal to +/- 5%.  
    - 11 Mobile band that is narrower or equal to +/- 2% (that is, it allows both the appreciation and depreciation over time).  
    - 12 De facto mobile band +/- 5% / Administered floating.  
    - 13 Freely floating.  
    - 14 Free falling.  
    - 15 Dual market in which parallel market data are lacking.
- Financial account openness (Index, from -2 to 2) — Chinn and Ito  
  - Range that goes from -2 to 2, where a negative value reflects greater restrictions to the transactions of the financial account.
- Economic Freedom (Index, from 0 to 100) — Heritage Foundation  
  - The Economic Freedom Index focuses on four key aspects of the economic environment over which governments typically exercise control of the policy: rule of law, size of government, regulatory efficiency, market opening. The higher the index, the greater the economic freedom.
- Property rights (Index, from 0 to 100) — Heritage Foundation  
  - The score for this component is obtained by averaging scores for the following five subfactors, all weighted equally: physical property rights, intellectual property rights, strength of investor protection, risk of expropriation and quality of land administration.
- Freedom from corruption (Index, from 0 to 100) — Heritage Foundation  
  - The score of the judicial effectiveness component is obtained by averaging the scores of the following three subfactors, which are weighted equally: judicial independence, quality of the judicial process and probability of obtaining favorable judicial decisions.
- Fiscal freedom (Index, from 0 to 100) — Heritage Foundation  
  - The score of this component is derived from quantitative subfactors: the upper marginal tax rate on individual income, the higher marginal tax rate on corporate income, the total tax burden as a percentage of GDP, the fiscal deficit as a percentage of the average GDP of the last 3 years and public debt as a percentage of GDP.
- Government expenditure (Index, from 0 to 100) — Heritage Foundation  
  - Total Government expenditure as a percentage of GDP.
- Business freedom (Index, from 0 to 100) — Heritage Foundation  
  - Doing Business Report, World Bank.
- Labor freedom (Index, from 0 to 100) — Heritage Foundation  
  - Seven quantitative subfactors have the same weighting, each one counted as a seventh of the labor freedom component: ratio between the minimum wage and the average value added per worker, impediment to hire additional workers, rigidity of the hours, difficulty in dismissing redundant employees, mandatory legal notice period, compensation for mandatory dismissal and participation rate in the work force.
- Monetary freedom (Index, from 0 to 100) — Heritage Foundation  
  - The score for the monetary freedom component is based on two subfactors: the weighted average inflation rate of the last three years and presence of price controls.
- Trade freedom (Index, from 0 to 100) — Heritage Foundation  
  - The free trade score is based on two factors: the trade-weighted average tariff rate and non-tariff barriers.
- Investment freedom (Index, from 0 to 100) — Heritage Foundation  
  - It is composed of 7 restrictions: national treatment of foreign investment, foreign investment code, land ownership restrictions, sectoral investment restrictions, sectoral investment restrictions, currency exchange controls, capital controls.
- Financial freedom (Index, from 0 to 100) — Heritage Foundation  
  - The Index qualifies the financial freedom of an economy by looking at five broad areas: the degree of government regulation of financial services, the degree of state intervention in banks and other financial firms through direct and indirect ownership, government influence in the allocation of credit, the extension of the development of the financial and capital markets, and openness to foreign competition.
- Socioeconomic conditions (Index, from 0 to 12) — International Country Risk Guide  
  - This is an assessment of socio-economic pressures in society that could restrict government action or fuel social dissatisfaction. The assigned risk rating is the sum of three subcomponents: unemployment, consumer confidence and poverty.
- Bureaucratic quality (Index, from 0 to 4) — International Country Risk Guide  
  - The institutional strength and quality of the bureaucracy is a buffer that tends to minimize policy revisions when governments change. Therefore, outstanding points are awarded to countries where the bureaucracy has the strength and experience to govern without drastic changes in policy or interruptions in government services. In a low-risk country, the bureaucracy tends to be somewhat autonomous in the face of political pressure and have an established mechanism of recruitment and training. Countries that lack the cushioning effect of a strong bureaucracy receive low points because a change in government tends to be traumatic in terms of policy formulation and day-to-day administrative functions.
- Rule of law (Index, from 0 to 6) — International Country Risk Guide  
  - "Law and order" form a single component, but its two elements are evaluated separately, and each element is scored from zero to three points. To evaluate the element "Law", the solidity and impartiality of the legal system are considered, while the element "Order" is an evaluation of the popular observance of the law. Therefore, a country can enjoy a high rating -3- in terms of its judicial system, but a low rating -1- if it suffers a very high crime rate or if the law is routinely ignored without an effective sanction (e. g. generalized illegalization of strikes).
- Corruption (Index, from 0 to 6) — International Country Risk Guide  
  - This is an evaluation of corruption within the political system. The most common form of corruption that companies directly face is financial corruption in the form of demands for special payments and bribes related to import and export licenses, exchange controls, tax liens, police protection or loans. Such corruption can hinder the effective conduct of business and, in some cases, may force the withdrawal or retention of an investment.  
  - Although the measurement considers this corruption, real or potential corruption in the form of excessive patronage, nepotism, work reserves, "favors for favors", funds from secret parties and suspiciously close links between politics is also considered. These insidious types of corruption are potentially much riskier for foreign companies, as they can generate popular discontent and encourage the development of black markets.  
  - The greatest risk of such corruption is that at some point it will become so dazzling, or some important scandal will be suddenly revealed, as to provoke a popular reaction, which will result in a fall or overthrow of the government, a major reorganization or restructuring of the government. the political institutions of the country, or, in the worst of cases, a collapse of law and order, making the country ungovernable.
- Democratic accountability (Index, from 0 to 6) — International Country Risk Guide  
  - This is a measure of how responsive the government is to its people, on the basis that the less receptive it is, the more likely it is that the government will fall peacefully (in a democratic society), but possibly violently (in an undemocratic one).
- Government stability (Index, from 0 to 12) — International Country Risk Guide  
  - This is an assessment of both the ability of the government to carry out its declared program(s) and its ability to remain in office. The assigned risk rating is the sum of three subcomponents: unity in the government, legislative force and popular support.
- Military in politics (Index, from 0 to 6) — International Country Risk Guide  
  - The military is not democratically elected. Therefore, their participation in politics, even at a peripheral level, is a diminution of democratic responsibility. However, it also has other significant implications. The military could, for example, become involved in government due to an actual or created internal or external threat. Such a situation would imply the distortion of government policy to deal with this threat, for example, by increasing the defense budget at the expense of other budgetary allocations.  
  - In some countries, the threat of military takeover may force an elected government to change the policy or have it replaced by another government more responsive to the wishes of the military. A military takeover or the threat of a takeover can also represent a high risk if it is an indication that the government cannot function effectively and that, therefore, the country has an uncomfortable environment for foreign companies.  
  - A large-scale military regime represents the greatest risk. In the short term, a military regime can provide new stability and thus reduce commercial risks. However, in the longer term, the risk will almost certainly increase, partly because the government system will become corrupt and partly because the continuation of that government will likely create an armed opposition. In some cases, military involvement in government can be a symptom rather than a cause of underlying difficulties.  
  - In general, a low risk rating indicates more military involvement in politics and therefore a higher level of political risk.
- External conflict (Index, from 0 to 12) — International Country Risk Guide  
  - The measure of external conflict is an assessment of the risk to the exercise of foreign action, from non-violent external pressure (diplomatic pressure, withholding of aid, trade restrictions, territorial disputes, sanctions, etc.) to violent external pressure (from border conflicts to total war).
- Internal conflict (Index, from 0 to 12) — International Country Risk Guide  
  - This is an assessment of political violence in the country and its actual or potential impact on governance. The highest rating is given to those countries where there is no armed or civil opposition to the government and the government does not allow arbitrary violence, direct or indirect, against its own people. The lowest rating is awarded to a country involved in an ongoing civil war.
- Religious tensions (Index, from 0 to 6) — International Country Risk Guide  
  - Religious tensions can derive from the domination of society and/or governance by a single religious group that seeks to replace civil law by religious law and exclude other religions from the political and/or social processes; the desire of a single religious group to dominate the government, the suppression of religious freedom; the desire of a religious group to express its own identity, separated from the country as a whole. The risk involved in these situations varies from inexperienced people who impose inappropriate policies through civil dissent to civil war.
- Ethnic tensions (Index, from 0 to 6) — International Country Risk Guide  
  - This component is an assessment of the degree of tension within a country attributable to racial, nationality or language divisions. Lower grades are awarded to countries where racial and nationality tensions are high because opposition groups are intolerant and unwilling to compromise. Higher ratings are awarded to countries where tensions are minimal, even though such differences still exist.

*Source: APPENDIX I. DATA (wp18266 - APPENDIX I. DATA).*

### APPENDIX II. ADDITIONAL CHARTS

### APPENDIX II. ADDITIONAL CHARTS

### Hyperinflation Cycle: Episodes by Country
- Chart time axis shown as: 1960 1980 2000 2020 (Year)
- Common chart label: InflationCycle
- Country charts and vertical axis tick labels as presented:
  - Angola: 0 1000 2000 3000 4000
  - Argentina: 0 1000 2000 3000 4000
  - Armenia: 0 1000 2000 3000 4000
  - Azerbaijan: 0 500 1000 1500 2000
  - Belarus: 0 500 1000 1500 2000 2500
  - Bolivia: 0 5000 10000 15000
  - Brazil: 0 1000 2000 3000
  - Bulgaria: 0 200 400 600 800 1000
  - Chile: 0 100 200 300 400 500
  - CongoDemocraticRepublic: 0 5000 10000 15000 20000 25000
  - Croatia: 0 500 1000 1500 2000
  - Indonesia: 0 500 1000 1500
  - Kazakhstan: 0 500 1000
  - Nicaragua: 0 2000 4000 6000 8000 10000
  - Peru: 0 2000 4000 6000 8000
  - Poland: 0 200 400 600
  - Russia: 0 200 400 600 800
  - Ukraine: 0 200 400 600 800 1000
  - Zimbabwe: 0 5000 10000 15000 20000 25000
- Source for charts: World Bank and Author's calculations.

### Notes on Presentation
- Figures depict hyperinflation episodes by country over the period indicated on the Year axis (1960, 1980, 2000, 2020).
- Vertical axis tick values preserved exactly as shown for each country chart.

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- Végh, Carlos A., 1989, “Government Spending and Inflationary Finance: A Public Finance Approach,” IMF Staff Papers, Vol. 36, pp. 657-77.
- Végh, Carlos A., 1992, “Stopping High Inflation: An Analytical Overview,” IMF Staff Papers, Vol. 39, pp. 629-95.
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*Sources: World Bank and Author's calculations.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18266.pdf_