The role of fiscal policies in the German hyperinflation: how unpleasant was the monetary arithmetic? *

Any review of the current status of European economic integration must take into account how, by pegging their exchange rates to the Deutschmark under the Exchange Rate Mechanism of the European Monetary System, the EC countries have seemingly imported the tight monetary policies of the Bundesbank. Indeed, it is often argued that the decline in the average inflation rates of the EC member countries can be attributed to lower long-term inflationary expectations stemming from the historic monetary and fiscal discipline of the Germans (see, for example, Giavazzi and Giovannini, 1989, Chapter 5). In spite of the pressures recently experienced by the Bundesbank in the face of the large fiscal outlays stemming from German unification, the anti-inflationary emphasis still remains very much in evidence.