Brazil and Argentina Hyperinflation Experience at the Beginning of the Research Paper

Brazil and Argentina Hyperinflation Experience at the Beginning of the 1990s - Research Paper Example The period of the relatively high level of inflation lasted for about 15 years i.e. from 1980 to 1994 and resulted in significant political, economic as well as a social crisis for the country. One of the key reasons for this hyperinflation in the country was the creation of money supply to finance fiscal expenditure of the country. Government rather than using the taxes or borrowing started to created new money and hence the creation of money supply. During the 1990s, consumer price index ran into the factor of over 5 trillion thus indicating the overall severity of the inflation faced by the country. Argentine also faced the similar situation during the 1990s however, the consistent increase in inflation lasted from 1975 to early 1990s. during that period the overall value of Argentine’s Peso went down and the country introduced massive changes and reforms in the 1990s to initiate the process of recovery.   Hyperinflation in Brazil Brazil was a case of chronic inflation wh ich finally turned into hyperinflation and resulted in serious damage for the country. The key reason for this hyperinflation was the excessive creation of money to finance the expansion projects of the government. Rather than relying on the borrowing or improving tax collection, the government simply resorted to printing new money thus creating excessive money supply in the country. At the start of 1990, the consumer price index in the country was to the factor of 100 Million which reached to over 5 trillion by the end of 1997. Such sharp and abnormal increase in the level of consumer price index sustained for almost a decade and proved detrimental to the overall economic future of the country. It is, however, critical to note that the 1990s were the period during which the overall rate of inflation started to moderate owing to strict reforms being undertaken by the government. Since Brazil was facing higher episodes of inflation since the 1970s, therefore, 1990s was the period dur ing which country started to take measures to arrest such trends. (Barbosa, Cunha, and Elvia,183 ) At the start of the 1990s, the rate of inflation was over 30,000% however, it gradually started to decline and reached a level of 16% in 1997. As discussed above, this was a period of relatively important reforms undertaken by the country which resulted in sharp decline in the hyperinflation and economy started to witness the relatively moderate level of inflation rates. (Samuels,547) During this period, saving rates were almost negative as people continued to spend their cash due to the fact that its value was being eroded rapidly. Interest rates soared to a relatively high level in order to reduce the inflation and people who were already suffering from high inflation rates were forced to face higher interest rates also. It is, however, critical to note that the real GDP during the period remained at stagnant levels due to better agriculture output as well as a consistent increase in population during the decade. A real high level of hyperinflation affected the real incomes of the households as the consistent increase in inflation eroded the purchasing power of the individuals.