The political economy of hyperinflation in Venezuela

We study the Venezuelan hyperinflation as a political phenomenon with distributional and efficiency effects. The hyperinflation originated in publicly financed benefits for the government’s low-income supporters and also had a distributional effect in wiping out the value of bonds and other financial assets of the middle and upper classes that opposed the government. We confirm the fiscal origin of the hyperinflation and also show that, with the inflation tax as the government’s principal source of supplementary revenue, policy managers did not avoid moving to the inefficient side of the Laffer curve. The rate of inflation exceeded Cagan’s revenue-maximizing inflation tax rate and therefore also Bailey’s efficient inflation tax rate.