Money, Banks and Finance in Economic Thought

Applying Allais’ method to Soviet hyperinflation of 1921-1924 and post-Soviet period of 1991-2017

Vymyatnina Yulia, European University at Saint-Petersburg

Hyperinflations in most countries are rare occasions with long-lasting consequences, but in most cases economic research seem to concentrate on finding out conditions how an economy might get into a hyperinflation or comparing empirical evidence to theoretical models. We have applied Allais’ method of modelling inflation ‘perceptions’ to various indicators of inflation for Russia of 1920s and for Russia of 1990s. We have found out that the method works reasonably well in the meaning that modelled inflation ‘perceptions’ do adjust to the changing level of actual inflation. The higher is the level of actual inflation, the higher is the accuracy of modelled inflation ‘perceptions’. For the inflation indicators of 1920s (unit of account – Sovznaki) it has been found that inflation perceptions were underestimating inflation more often than overestimating it. Among the possible explanations of this fact are: late availability of information on actual inflation and a better knowledge of price changes of a product in which particular economic agents trade. The latter hypothesis has been confirmed by modelling inflation perceptions for separate goods during 1920s. For the inflation indicators of 1920s (measured in chervonets) and for inflation indicators of 1990s it has been found that inflation perceptions systematically ‘overshoot’ actual inflation. This can be explained by the fact that inflation erodes purchasing power of money, and an estimate of the rate of memory decay about this shows that in both cases it would take more than 40 years to make economy to forget about the past hyperinflation episodes (providing no new periods of high inflation). The dynamics of inflation perceptions based on Allais’ method correlates closely with the dynamics of inflation expectations measured for the Bank of Russia, suggesting that the method is potpotentially useful in terms of providing data for the forward-looking models.

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Keywords: hyperinflation, inflation expectations, Russia, Soviet Union

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