Was a sudden stop at the origin of German hyperinflation?

Abstract

Since the publication of Cagan's seminal contribution in 1956 and its further development by Sargent (1982) there has been a growing literature that seeks to explain German hyperinflation in terms of the monetary hypothesis. However, this article shows that the origins of this hyperinflation can be traced back to a sudden stop that occurred in the summer of 1922 at a time when expectations that the German economy would stabilise began to subside. The reversal of capital flows that took place in those months led in the short term to a dramatic depreciation of the mark, a significant increase in prices and a decline in output. This decline sparked bitter social conflict that fuelled a wage and price spiral. This spiral was accommodated by monetary authorities, leading in turn to explosive inflation.