The Consequence of National Currency Redenomination: Would Dropping Zeroes From Domestic Currency Result in Inflation?

Message:
Abstract:
It is due to considerable devaluation of Rial in recent years that special attention is given to the redenomination of national currency. Although the devaluation is to such an extent that redenomination is unavoidable, yet mainly due to apprehension about the possible incidence of inflation, there is a hesitation and procrastination about it.
This article examines the currency redenomination policy from the view point of its possible inflationary impact. In doing so, the focus is placed on the money supply, after such a policy is implemented. If redenomination together with issuing larger denominated bank notes increase the money demand for currency, money multiplies will be reduced and hence the money supply. In order to investigate such a consequence, a theoretically based demand function for currency is specified and estimated by using Cointegration method and time-series annual data for the period 1338-1391.
Estimation result indicate that the issuance of larger denominated bank notes and coins will increase the amount of notes and coins demand by the public. This will increase the ratio of bank notes to bank deposits and hence will reduce the money multiplier which is of an deflationary nature.
In order to asses the inflationary aspect of redenomination polices in countries that carried out such a policy, a model based on quantity theory of money is derived and estimate for some of the countries that the needed data were available . The results indicate that currency redenomination not only didnt bring about inflation, but in some countries resulted in the reduction of the rate of inflation.
Language:
Persian
Published:
نشریه نظریه های نوین اقتصادی, Volume:1 Issue: 1, 2014
Page:
149
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