The German hyperinflation in 1923 was caused by monetary financing of the highly deficient German state budget by a dependent central bank. The social and economic consequences of the hyperinflation were disastrous. Combined with an instable political atmosphere, paving the way for the rise of the Nazis, the hyperinflation is deeply etched in the German collective memory. It is this collective memory that shapes the current institutional framework of the ECB. While risk aversion and institutional imprint of the ECB’S policy makers differ, the ECB’s institutional framework ensures that current inflation will not evolve into a hyperinflation.
Inflation rates in the euro area have reached historic highs due in large part to high energy prices. As the euro area is a net importer of energy, one refers to this inflation as imported inflation. There is a danger that these high inflation rates will become entrenched in inflation expectations. This would not only imply that high inflation rates will persist but it could also cause a dangerous upward price spiral. Consequently, the ECB should communicate more clearly and more credibly that it will counteract this danger and act accordingly as the costs of disinflation will remain higher the longer the ECB waits to act.
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