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Chronic inflation
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Chronic inflation
Chronic inflation is an economic phenomenon occurring when a country experiences high inflation for a prolonged period (several years or decades) due to continual increases in the money supply among other things. In countries with chronic inflation, inflation expectations become 'built-in', and it becomes extremely difficult to reduce the inflation rate because the process of reducing inflation by, for example, slowing down the growth rate of the money supply, will often lead to high unemployment until inflationary expectations have adjusted to the new situation.
Chronic inflation is distinct from hyperinflation.
Even more so than hyperinflation, chronic inflation is a 20th-century phenomenon, being first observed by Felipe Pazos in 1972. High inflation can only be sustained with unbacked paper currencies over long periods, and before World War II unbacked paper currencies were rare except in countries affected by war – which often produced extremely high inflation but never for more than a few years. Most economists believe chronic inflation first emerged in Latin America following World War II, with the result that it was originally called "Latin inflation". Some economists, however, argue that the experience of France in the 1920s was the first case of chronic inflation. Japan (see below) in the years surrounding World War II is another case with characteristics very akin to well-studied cases of chronic inflation.
Monetarists state that chronic inflation is caused by chronic growth of the money supply, a position that is accepted by most mainstream economists. This paragraph describes reasons for persistent monetary growth.
In the 1960s and 1970s, chronic inflation was attributed to powerful political group interests with radically divergent policy demands; the power of labour unions to demand high wages for workers, often in obsolete economic sectors, conflicted with the somewhat feudal political structures of the affected countries. Under these conditions, a return to a commodity money that would curb inflation quickly is politically suicidal, so governments of countries affected by chronic inflation have invariably had to resort to more subtle methods of reducing inflation, such as central bank reforms or indexing price and wage levels to the future value of money. This, however, leads to "inflation inertia" and ultimately to a public that becomes skeptical of attempts to reduce inflation: unlike hyperinflation, history has shown that communities can live with moderate chronic inflation relatively easily.
Other sources have argued that chronic inflation is caused by governments seeking to optimize seignorage taxes in order to pay most efficiently for public programmes, or because the societies in which it developed have consistently imported more than they can export and their currencies have had to devalue constantly to make their imports more expensive without elasticity being sufficient to reduce demand. Along the same lines, there have also been arguments for demographic causes of chronic inflation as resulting from populations growing more rapidly than production in developing nations from the 1950s to the 1980s, and until today in sub-Saharan Africa. Increasingly it is also thought that environmental or ecological stresses and disasters can trigger a period of systemic inflation by governments unable to effectively handle the situation.
The Argentine economy has a long history of experiencing trouble with prolonged high inflation rates. In 1989, Argentina experienced a hyperinflation crisis as a result of bad economic policies, which led to an inflation rate of 257%. The hyperinflation crisis caused protests, riots, looting and a general decline of the government popularity among the public. This hyperinflation crisis had also taken place in the middle of the presidential elections, which led to the governing party to lose the elections.
During the 1990s, thanks to the convertibility plan, which pegged the austral (and, afterward, the peso) to the United States Dollar value, inflation rates decreased nearly to 0%. These policies ended with a catastrophic economic crisis in 2001.
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Chronic inflation
Chronic inflation is an economic phenomenon occurring when a country experiences high inflation for a prolonged period (several years or decades) due to continual increases in the money supply among other things. In countries with chronic inflation, inflation expectations become 'built-in', and it becomes extremely difficult to reduce the inflation rate because the process of reducing inflation by, for example, slowing down the growth rate of the money supply, will often lead to high unemployment until inflationary expectations have adjusted to the new situation.
Chronic inflation is distinct from hyperinflation.
Even more so than hyperinflation, chronic inflation is a 20th-century phenomenon, being first observed by Felipe Pazos in 1972. High inflation can only be sustained with unbacked paper currencies over long periods, and before World War II unbacked paper currencies were rare except in countries affected by war – which often produced extremely high inflation but never for more than a few years. Most economists believe chronic inflation first emerged in Latin America following World War II, with the result that it was originally called "Latin inflation". Some economists, however, argue that the experience of France in the 1920s was the first case of chronic inflation. Japan (see below) in the years surrounding World War II is another case with characteristics very akin to well-studied cases of chronic inflation.
Monetarists state that chronic inflation is caused by chronic growth of the money supply, a position that is accepted by most mainstream economists. This paragraph describes reasons for persistent monetary growth.
In the 1960s and 1970s, chronic inflation was attributed to powerful political group interests with radically divergent policy demands; the power of labour unions to demand high wages for workers, often in obsolete economic sectors, conflicted with the somewhat feudal political structures of the affected countries. Under these conditions, a return to a commodity money that would curb inflation quickly is politically suicidal, so governments of countries affected by chronic inflation have invariably had to resort to more subtle methods of reducing inflation, such as central bank reforms or indexing price and wage levels to the future value of money. This, however, leads to "inflation inertia" and ultimately to a public that becomes skeptical of attempts to reduce inflation: unlike hyperinflation, history has shown that communities can live with moderate chronic inflation relatively easily.
Other sources have argued that chronic inflation is caused by governments seeking to optimize seignorage taxes in order to pay most efficiently for public programmes, or because the societies in which it developed have consistently imported more than they can export and their currencies have had to devalue constantly to make their imports more expensive without elasticity being sufficient to reduce demand. Along the same lines, there have also been arguments for demographic causes of chronic inflation as resulting from populations growing more rapidly than production in developing nations from the 1950s to the 1980s, and until today in sub-Saharan Africa. Increasingly it is also thought that environmental or ecological stresses and disasters can trigger a period of systemic inflation by governments unable to effectively handle the situation.
The Argentine economy has a long history of experiencing trouble with prolonged high inflation rates. In 1989, Argentina experienced a hyperinflation crisis as a result of bad economic policies, which led to an inflation rate of 257%. The hyperinflation crisis caused protests, riots, looting and a general decline of the government popularity among the public. This hyperinflation crisis had also taken place in the middle of the presidential elections, which led to the governing party to lose the elections.
During the 1990s, thanks to the convertibility plan, which pegged the austral (and, afterward, the peso) to the United States Dollar value, inflation rates decreased nearly to 0%. These policies ended with a catastrophic economic crisis in 2001.