Why stable fiat money hyperinflates: Results from an experimental economy

Experiments are used to study acceptance of a fiat money as a medium of exchange. In these finite horizon markets, people trade valuable goods for intrinsically worthless money. However, when a public sector capable of printing money is introduced, the private sector is crowded out, producing dramatic hyperinflations and collapses in trading. This economic failure is found to be a consequence of the public sector undermining the market's ability to coordinate trade. The inefficiency associated with the hyperinflation is found not to be a purely monetary phenomenon resulting from an increasing money supply.