Evaluating Risks of Hyperinflation Post COVID-19 Pandemic

Abstract

The COVID-19 pandemic represented a logical Catch 22 scenario in the world of financial economics. The pandemic saw a sudden and unanticipated plunge in Money Velocity, Consumer Confidence, Employment, and Industrial Output. At the same time, due to fiscal and monetary stimulus measures in the form of quantitative easing and stimulus checks, the US saw an unanticipated rise in its Money Stock. With new waves of the virus and long-lasting labor shortages, a possible surplus liquidity scenario might arise. The United States faces a potentially high inflation rate scenario in such a case. This study draws insights from similar historical precedents and aims to model inflation as a function of macroeconomic variables: unemployment, money stock, money velocity, and industrial production. The study concludes that current percentage inflation already exceeds forecast estimates in the absence of a pandemic scenario through an OLS model. Recognizing transmission lags from exogenous variables to the target variable, an ARDL model is employed, which can incorporate differing leads/lags. Both the models predicted a lower inflation rate in the absence of Pandemic and Government Intervention than the actual inflation rate. This was deemed prima facie evidence that inflationary pressure from an increase in Money supply overpowered decreases in employment and money velocity. It was posited that when the economy reopens, this effect may further worsen due to the theoretically direct relationship between velocity, employment, and inflation. The study cautions runaway inflation, akin to Latin America’s failed trials in Modern Monetary Theory type policies and many instances enshrined in history.