1990 Articles

Economic Exchange During Hyperinflation

Casella, Alessandra M.; Feinstein, Jonathan S.

Historical evidence indicates that hyperinflations can disrupt individuals'
normal trading patterns and impede the orderly functioning
of markets. To explore these issues, we construct a theoretical model
of hyperinflation that focuses on individuals and their process of
economic exchange. In our model buyers must carry cash while
shopping, and some transactions take place in a decentralized setting
in which buyer and seller negotiate over the terms of trade of an
indivisible good. Since buyers face the constant threat of incoming
younger (hence richer) customers, their bargaining position is weakened
by inflation, allowing sellers to extract a higher real price. However,
we show that higher inflation also reduces buyers' search,
increasing sellers' wait for customers. As a result, the volume
of transactions concluded in the decentralized sector falls. At high
enough rates of inflation, all agents suffer a welfare loss.