Zero monetary effect

Zero inflation, deflation and hyperinflation effect.

Implementing IFRS and US GAAP authorized Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI 

during

1. low inflation results in zero low inflation effect,

2. high inflation results in zero high inflation effect,

3. hyperinflation results in zero hyperinflation effect and

4. deflation results in zero deflation effect.

South American countries´ central banks called it "monetary correction" in the 1970s to 1990s. The best example was the implementation of this principle with the use of the Daily Unidade Real de Valor in Brazil in 1994. 

Zero monetary effect can only be achieved when CMUCPP is implemented to reflect every change in the general price level, that is, at least daily in terms of the Daily CPI in non-hyperinflationary economies.

CMUCPP also has to be implemented in terms of the Daily CPI or daily parallel rate when a Daily CPI is not available during hyperinflation. 

However, it must be remembered that the general price level can and sometimes does change more than once a day during hyperinflation. This must be accompanied in the whole hyperinflationary economy, in accounting records and in contracts in order to correctly achieve zero hyperinflationary effect. 

Under all the above circumstances, the constant purchasing power of all constant real value non-monetary items (e.g., all items in shareholders equity, trade debtors, trade creditors, salaries, wages, pensions, taxes payable, taxes receivable, etc.) would automatically be maintained constant - ceteris paribus.

Nicolaas Smith Copyright (c) 2005-2018 Nicolaas J Smith. All rights reserved. No reproduction without permission.