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This paper contributes to the literature on hyperinflation and stabilizations by analyzing the great Yugoslav hyperinflation and stabilization during the period 1992 to 1994. The paper makes three contributions. First, it provides updated and more accurate estimates of key economic variables on economic activity, public finances, and seigniorage revenues during hyperinflation based on most recent and updated data. Second, it identifies and analyzes salient features, causes, transmission mechanisms, and monetary consequences of the extreme Yugoslav hyperinflation in the period 1992-1994. It discusses what we call the fundamental equations of the Yugoslav hyperinflation and their implications for inflation expectations and subsequent stabilization. And third, it analyzes the implementation, achievements, and challenges of the currency reform and stabilization program that ended hyperinflation, highlighting the roles of the currency board, currency reform, and of the architect of the program, Dragoslav Avramović, the then governor of the Central Bank of FR Yugoslavia.

Using recently developed right-tailed sequential unit root tests at daily frequency in the extreme portion of the Serbian hyperinflation, we found that the money supply and the exchange rate exploded while the economy was approaching the maximum of the inflation tax Laffer curve, and remained explosive while on the wrong, decreasing side of that curve throughout the end of the hyperinflation. Money supply exploded as government tried first to raise seigniorage to a new higher plateau, and subsequently to prevent, albeit unsuccessfully, a decline in seigniorage while the economy was sliding down the decreasing side of the Laffer curve. The rational bubble was not found as the exchange rate explosiveness was driven by the explosiveness of its fundamental value: current and expected future money supply. Thus, even the extreme portion of the Serbian hyperinflation was driven by ever expanding money supply in the government quest for additional seigniorage and not by the rational bubbles.

The paper explores the link between the inflationary environment and the size of the exchange rate pass-through (ERPT) into domestic prices, as inflation descends from an extreme, second highest and second longest hyperinflation in the 20th century, to high and then moderate inflation in Serbia. We found that ERPT decreases with a decline in the inflation level, variability and persistence, thus supplementing findings previously acquired in panel studies across countries. Our findings can be explained by surging empirical evidence on state contingent behavior of pricing, which indicates a sharp increase in the frequency of price adjustment as one moves from moderate, via high to hyperinflation, suggesting that the degree of price rigidities is a key determinant of the size and speed of ERPT. ERPT estimates are embedded in careful analysis of inflation episodes in Serbia, showing that hyper and high inflation episodes subscribe to the same, fiscal explanation, as opposed to the moderate inflation ones, where supply and demand shocks have been the main inflation drivers.

This paper shows that exchange rate depreciation in Serbia improves trade balance in the long run, while giving rise to a J-curve effect in the short run. These results add to the already existent empirical evidence for a diverse set of other economies. Both Johansen's and autoregressive distributed lag approach are respectively used giving similar long-run estimates showing that real depreciation improves trade balance. Corresponding errorcorrection models as well as impulse response functions indicate that, following currency depreciation, trade balance first deteriorates before it later improves, i.e. exhibiting the J-curve pattern. These results are relevant for policy making both in Serbia and in a number of other emerging Europe countries as they face major current account adjustments after BoP crises of 2009.