The inflation in Bolivia during 1984 and 1985 was the most rapid in Latin American history, and one of the highest in world history. During the twelve-month period, August 1984 to August 1985, prices rose by 20,000 percent, and during the final months of the hyperinflation, from May 1985 to August 1985, the inflation surged to an annualized rate of 60,000 percent (Sachs, 1986). The Bolivian inflation is the only case in thirty-five years of a “true” hyperinflation, applying Phillip Cagan’s 1956 classic definition of price increases exceeding 50 percent per month .
After a great economical and social struggle, the Bolivian government with the help of world recognized economist Jeffrey Sachs formulated a financial program that curbed the hyperinflation. The program had a very basic premise: a balanced budget. Government spending shouldn´t be more than its revenue. As the program began to work policy makers recommended that the Bolivian Central Bank use its funds to support the value of the Bolivian currency, and therefore a crawling peg system of exchange was created, called “bolsin”(Cariaga, 1996). Despite achieving the pursued goal of finishing hyperinflation, this policy had a contrary effect because it resulted in Bolivians who were afraid to hold their assets in Bolivian currency. The transfer of funds back into the Bolivian currency further shored up its value and led to even more capital outflows from the country.
Thereafter monetary and fiscal policy in Bolivia produced a relative stability, (see Table 1). However it did take more than a decade for the rate of inflation to reach levels consistently below 10% per year.
Product of this set of policies and the tremendous trauma caused by the hyperinflation process, the Bolivian public showed a persistent loss of confidence in the national currency (boliviano), which caused a “de facto” dollarization process of the economy. To illustrate this point see Table 2, which compares the percentage of deposits in foreign currency for Latin American countries, the case of high dollarization in Bolivia is easily recognizable.
Table 1 Evolution of CPI and inflation % in Bolivia 1984-2010
Table 2 Deposits in Foreign currency in selected LAC countries in 2007
1. Cagan, P. (1956). The monetary dynamics of hyperinflation Studies in the quantity theory of money (pp. 25-117). Chicago, USA: University of Chicago Press.
2. Cariaga, J. L. (1996). Estabilización y Desarrollo: Importantes lecciones del programa económico de Bolivia. La Paz, Bolivia: Editorial los Amigos del Libro.
3. Sachs, J. D. (1986). The Bolivian hyperinflation and stabilization. National Bureau of Economic Research Cambridge, Mass., USA.