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What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts support the Rational Expectation Hypothesis?
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EC313 International Economic Systems Topic: What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts support the Rational Expectation Hypothesis? After World War I, the pressure of wartime finance forced belligerents such as Germany, Austria and Hungary off the gold standard, which had served in the prewar period to stabilize price movements. These countries resorted to large-scale borrowing and the printing of paper money to finance the war reparation and this caused severe hyperinflations in 1920s, resulted dislocation in both national and international economies. To end the hyperinflation, these countries made some deliberate changes in their monetary and fiscal policies. In this paper, I will analyze policy changes in Germany, Austria and Hungary separately. Furthermore, expectations play a central role in hyperinflations. Under rational expectations, economic agents respond to credible changes in government policy by altering their strategies. So a correctly perceived change in policy regime can...
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