On the measurement of Zimbabwe's hyperinflation.

• Author: Hanke, Steve H.

Zimbabwe experienced the first hyperinflation of the 21st century. (1) The government terminated the reporting of official inflation statistics, however, prior to the final explosive months of Zimbabwe's hyperinflation. We demonstrate that standard economic theory can be applied to overcome this apparent insurmountable data problem. In consequence, we are able to produce the only reliable record of the second highest inflation in world history.

The Rogues' Gallery

Hyperinflations have never occurred when a commodity served as money or when paper money was convertible into a commodity. The curse of hyperinflation has only reared its ugly head when the supply of money had no natural constraints and was governed by a discretionary paper money standard.

The first hyperinflation was recorded during the French Revolution, when the monthly inflation rate peaked at 143 percent in December 1795 (Bernholz 2003: 67). More than a century elapsed before another hyperinflation occurred. Not coincidentally, the intervening period represented the heyday of the gold standard. The 20th century witnessed 28 hyperinflations (Bernholz 2003: 8). Most were associated with the monetary chaos that followed the two World Wars and the collapse of communism. Zimbabwe's hyperinflation of 2007-08 represents the first episode in the 21st century and the world's 30th hyperinflation.

Most hyperinflations (17) occurred in Eastern Europe and Central Asia, with Latin America accounting for 5 and Western Europe for 4. While Southeast Asia and Africa accounted for 2 hyperinflations each, the United States has avoided hyperinflation. It came close, however, during the Revolutionary War, when the revolutionary government churned out paper continentals to pay bills. The monthly inflation rate reached a peak of 47 percent in November 1779 (Bernholz 2003: 48). A second close encounter occurred during the Civil War, when the Union government printed greenbacks to finance the war effort. Inflation peaked at a monthly rate of 40 percent in March 1864 (Bernholz 2003: 107).

Zimbabwe first breached the hyperinflation benchmark in March 2007 (Table 1). After falling below the 50 percent threshold in July, August, and September 2007, inflation soared, peaking at an astounding monthly rate of 79.6 billion percent in mid-November 2008. At that point, as one of us anticipated, people simply refused to use the Zimbabwe dollar (Hanke 2008: 9), and the hyperinflation came to an abrupt halt.

As incredible as Zimbabwe's November 2008 inflation rate was, it failed to push Zimbabwe to the top of the world's hyperinflation league table. That spot is held by Hungary (Table 2).

Zimbabwe's Data Void

Even though the Reserve Bank of Zimbabwe produced an ever-increasing torrent of money, and with it ever more inflation, it was unable, or unwilling, to report any meaningful economic data during most of 2008. Indeed, the last Reserve Bank balance sheet and money supply data produced in 2008 were for March (Reserve Bank of Zimbabwe 2008a). As for the 2008 inflation data, the last available figures were for July, and these were not released until October (Reserve Bank of Zimbabwe 2008b).

This data void hid Zimbabwe's hyperinflation experience under a shroud of secrecy: Our problem was to lift that shroud by measuring inflation after July 2008, when conventional inflation measures were not available.

PPP to the Rescue

Does economic theory provide any insights that might assist in solving our problem? The principle of purchasing power parity (PPP) should be able to come to our rescue. PPP states that the ratio of the price levels between two countries is equal to the exchange rate between their currencies. Changes in the exchange rate and the ratio of the price levels move in lock step with one another, with the linkage between the exchange rate and price level maintained by price arbitrage.

To determine the PPP for Zimbabwe relative to the United States, let

[P.sub.ZIM] = the Zimbabwe price level in Zimbabwe dollars (ZWD),

[P.sub.US] = the United States price level in U.S. dollars (USD), and

[E.sub.ZWD/USD] = the exchange rate (ZWD per unit of USD).

Then PPP, in a static sense, states that:

(1) [P.sub.ZIM]/[P.sub.US] = [E.sub.ZWD/USD]

PPP can be interpreted in a dynamic sense by looking at the changes in price levels and values of currencies over time. This relative form of...