Prof. Steve H. Hanke: Three Options to Restore Value of Iran’s National Currency

Interview with Steve H. Hanke

By: Kourosh Ziabari   Iran Review  October 25, 2012

Targeted with the biting sanctions of the United States and European Union over its nuclear program, Iran’s economy is experiencing difficult and breathtaking days. The import of vital goods, including medicine and foodstuff is being impeded, the energy, insurance, transportation and industrial companies are unable to smoothly do business with their foreign counterparts and their financial transactions have been obstructed and the price of goods increases on a daily basis.

Prof. Steve H. Hanke, Professor of Applied Economics at the Johns Hopkins University believes that Iran is facing hyperinflation, with a monthly inflation rate of nearly 70% per month and its national currency, rial, has lost its value against the U.S. dollar dramatically.

Prof. Hanke is an internationally renowned economist, who specializes in international economics with a particular focus on monetary policy. He is a Senior Fellow at the Cato Institute, co-director of the Johns Hopkins Institute for Applied Economics, Global Health, and Study of Business Enterprise, and a contributing editor at “Globe Asia magazine.” Prof. Hanke also serves on the Financial Advisory Council of the United Arab Emirates, as well as on the National Bank of Kuwait’s International Advisory Board.

He has provided consultation to several countries grappling with hyperinflation in the past decade. According to Prof. Hanke, Iran has three options to put an end to its shocking inflation and free-fall of the value of its national currency.

What follows is the text of Iran Review’s interview with Prof. Hanke who spoke to us from Paris and discussed the current situation of Iran’s economy and the scenarios which can help to salvage its troubled economy.

Q: Iran is the latest country added to the Hanke-Krus Hyperinflation Index. Would you please explain about this table and its indicators? How do you record the start date and end date of the hyperinflation, time required for prices to double and daily inflation rate, as you did to several countries such as China, Hungary and Greece in the past 50 years?

A: The Hanke-Krus Hyperinflation Table lists every episode of hyperinflation in history, ranking the episodes in order of their highest monthly inflation rate. It uses Philip Cagan’s (1956) widely-accepted definition of hyperinflation: a price-level increase of at least 50% per month.

Thus, an episode of hyperinflation starts when there is a month in which the inflation rate increases by at least 50%. When the monthly inflation rate drops below 50% and stays there for at least one year, the episode is said to end. For example, in the case of Hungary’s 1945/46 episode of hyperinflation, the monthly inflation rate exceeded 50% per month from August 1945 until its peak in July 1946. For the next 12 months, the monthly inflation rate was below 50%. From this, we conclude that the episode started in August 1945 and lasted until July 1946.

One of the biggest problems encountered when discussing hyperinflation is the extreme size of the monthly inflation rates. For example, in 2009, Alex Kwok and I determined that Zimbabwe had a peak monthly inflation rate of 7.96 x 10^10%, in Mid-November 2008. This number is obviously quite hard to comprehend. To address this, Nick Krus and I included the equivalent daily inflation rate and the time required for prices to double. These numbers are calculated using the highest monthly inflation rate and “shrinking” the rate to a smaller time period. Accordingly, we calculated that Zimbabwe had a daily inflation rate of 98% in Mid-Nov. 2008 implying that prices doubled almost every day, every 24.7 hours to be precise. …

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image: flickr.com/jadijadi

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