Avoiding hyperinflation: Evidence from a laboratory economy

Hyperinflation results from the creation and injection of fiat money into the economy. Using laboratory methods, this paper examines conditions under which fiat money can serve as a medium of exchange in a finite horizon economy while the government is active in the markets for goods. Consistent with the rational expectations hypothesis, issuing new fiat currency does not stabilize a hyperinflation; however, restricting government spending to the amount of tax revenue or reverting to backed money does. These findings are consistent with previous studies of historical data; thus this work confirms those findings from an alternative data source, the laboratory. 2003 Elsevier Inc. All rights reserved. JEL classification: C90; E42; E63