& Tornado Alley
Bolivia pursued for decades the typical Latin American fiscal policy of covering government budget deficits by printing money. The result of that policy was a hyperinflation in 1983-1985 that increased prices by about 23,000 percent. The index numbers during that period are not available.
In 1985 Gonzalo Sanchez de Lozada, working with Jeffrey Sachs of Harvard, formulated a financial program that curbed the hyperinflation. The program was basic. The government maintained a balanced budget. It did not spend any more than it took in in taxes. As the program began to work Jeffrey Sachs recommended that the Bolivian Central Bank use its funds to support the value of the Bolivian peso. This was a remarkable financial coup because it resulted in Bolivians who were afraid to hold their assets in Bolivian pesos regaining their confidence. The transfer of funds back into the Bolivian peso further shored up its value and led to even more capital flows back into Bolivia.
Thereafter monetary and fiscal policy in Bolivia produced a relative stability, as seen in the following statistics. However it did take more than a decade for the rate of inflation to reach a levels consistently below 10% per year.
|Price Levels in Bolivia, 1984 to 2006|
The following statistics show the expansion of the money supply in Bolivia over the period of the hyperinflation and thereafter. There was a corresponding inflation in the nominal GDP. The computed velocities of money do not seem to make much sense in terms of the expected response of the public to the inflation but that is probably due to the limited accuracy of the statistics. It is hard to compile accurate statistics during a period in which prices are changing so rapidly.
|Money and GDP in Bolivia, 1980 to 1997|
The relevant statistics for the period are the levels of real GDP and real percapita GDP.
|Real GDP, Population and
percapita GDP in Bolivia,
During the hyperinflation the real GDP did decline and its value percapita declined even further. Percapita GDP in 1986 was almost 18 peercent below its level in 1980. Once the hyperinflation was controlled the economy began to achieve real growth and moderate increases in percapita real GDP. However the level of percapita real GDP had not reached the 1980 level even in 1997.
(To be continued.)
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