Reasons For Hyperinflation In Developing Countries (Essay Sample)

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Economics
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Reasons for Hyperinflation in Developing Countries
Hyperinflation refers to the rapid upswing in the inflation rates. High inflation rates lead to devaluation of a country's currency and a rise in the nominal prices of services and goods in that particular country (Swanson 56). Inflation has affected developing countries such as Zimbabwe, Greece, and Hungary, leading to depreciation of the local currency. Hyperinflation is an uncommon phenomenon that affects the economy of a nation and negatively affects distressed economies (Swanson 87). The essay aims to evaluate the factors that lead to hyperinflation in developing countries.
Currency disparities in troubled countries have led to hyperinflation. Low confidence levels on a country's currency result in currency variations, effectively causing hyperinflation. Most developing nations’ expenses outstrip revenues, leading to excessive borrowing. Recent surveys indicate that majority of developing countries have high debt ratios to GDP (Gross Domestic Product). Moreover, rampant corruption and incompatible monetary and fiscal policies have led to the increase in money supply, effectively causing hyperinflation. Economists believe devaluation of the currencies reduces inflationary pressures on the economy. However, currencies under a floating exchange rate are more likely to succumb to hyperinflation (Fischer 25). Zimbabwe suffered hyperinflation and instead legalized the use of foreign currency in the domestic market. Consequently, currency disparities are common causes of hyperinflation in developing nations.
Countries that lacked monetary policy organizations suffered hyperinflation. Central banks have supervisory roles in the banking sector, enhancing the financial development in any economy. Moreover, central banks implement fiscal policies in an economy. Central banks use monetary tools such as interest rates, OMO (Open Market Operations) and bank reserves to regulate money supply in an economy. Weimar Germany suffered hyperinflation because the nation lacked a central bank, to supervise banking operations in the country. Banks in the nation advanced loans to risky clients and sourced for cheaper funds, leading to an increase in money supply in the economy (Kararach and Raphael 57). Similarly, the complexity of the European Union’s monetary policy has been cited as one of the causes of the Greek financial crisis. Consequently, hyperinflation is highly unlikely in nations with central banks.
Developing countries have adopted expansionary monetary policies, leading to hyperinflationary pressures. Economists believe that developing countries should take the expansionary monetary policy to enhance easier access to funds, needed to improve private investment and consumption. Moreover, governments require substantial funds to improve infrastructure in most developing nation (Fischer 33). Uganda previously adopted an expansionary monetary policy to support the dwindling economy, leading to hyperinflationary pressures in the economy (Kararach and Raphael 89).
Similarly, Indonesia took an expansionary monetary policy to achieve middle-income status in the medium term, leading to prices hikes of consumer goods. Indonesia sought for...