Dropping Zeros, Gaining Credibility? Currency Redenomination in Developing Nations

Abstract

www.unc.edu/~lmosley/ Abstract: This paper investigates the conditions under which developing and transition nations engage in currency redenomination. Given that many governments of developing countries experience high levels of inflation and deterioration in their currencys value against other currencies, why do some elect to redenominate, while others do not? And why do some governments wait many years after a bout of hyperinflation, or after their currency is priced at 1000 or 5000 units to the dollar, to redenominate, while others do so relatively quickly? I suggest that the explanations rest in a combination of economic and political factors, including inflation, governments concerns about credibility, and the effect of currencies on national identity. I employ survival analysis to test these expectations, using a set of data for developing and transition nations, covering the 1960-2003 period. I find, not surprisingly, that inflation is an important predictor of redenomination. Redenomination also is related to political variables, including governments time horizons, the governing partys ideology, the fractionalization of the government and legislature, and the degree of social heterogeneity.

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