The monetary analysis of hyperinflation and the appropriate specification of the demand for money

Sokic, Alexandre (2010): The monetary analysis of hyperinflation and the appropriate specification of the demand for money.

Abstract

The paper emerges from the failure of the traditional models of hyperinflation with rational expectations or perfect foresight. Using the insights from two standard optimizing monetary settings the paper shows that the possibility of perfect foresight monetary hyperinflation paths depends robustly on the essentiality of money. We show that the popular semilogarithmic form of the demand for money is not appropriate to analyse monetary hyperinflation with perfect foresight. We propose a simple test of money essentiality for the appropriate specification of the demand for money equation in empirical studies of hyperinflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary hyperinflation, inflation tax, money essentiality
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

References

Adam, K., G.W. Evans, and S. Honkapohja (2006), «Are hyperinflation paths learnable?», Journal of Economic Dynamics and Control, 30, pp. 2725-2748.

Arce, O.J. (2009), «Speculative Hyperinflations and Currency Substitution», Journal of Economic Dynamics and Control, 33, pp. 1808-1823.

Ashworth, J., and L. Evans (1998), «Functional Form of the Demand for Real Balances in Cagan’s Hyperinflation Model», Applied Economics, 30, pp. 1617-1623.

Bernholz, P., and H. Gersbach (1992), «The Present Monetary Theory of Advanced Inflation: a Failure? », Journal of Institutional and Theoretical Economics, 148, pp. 705-719.

Barbosa, F.H., and A.B. Cunha (2003), «Inflation Tax and Money Essentiality», Economic Letters, 78, pp. 187-195.

Barbosa, F.H., A.B. Cunha, and E.M. Sallum (2006), «Competitive Equilibrium Hyperinflation under Rational Expectations», Economic Theory, 29, pp. 181-195.

Bruno, M. (1989), «Econometrics and the Design of Economic Reform», Econometrica, 57, pp. 275-306.

Bruno, M., and S. Fischer (1990), «Seigniorage Operating Rules and the High Inflation Trap», The Quarterly Journal of Economics, 105, pp. 353-374.

Buiter, W. (1987), «A Fiscal Theory of Hyperdeflations? Some Surprising Monetarist Arithmetic», Oxford Economic Papers, 39, pp. 111-118.

Cagan, P. (1956), «The Monetary Dynamics of Hyperinflation», in M. Friedman (Ed), Studies in the Quantity Theory of Money, Chicago, The University of Chicago Press, pp. 25-117.

Calvo, G., and L. Leiderman (1992), «Optimal Inflation Tax under Pre-commitment: Theory and Evidence», American Economic Review, 82, pp. 174-194.

Evans, J.L. (1995), «The Demand for Money: Hyperinflation or High Inflation Traps», The Manchester School of Economic & Social Studies, 63 (supplement), pp. 40-56.

Evans, J.L., and G. Yarrow (1981), «Some Implications of Alternative Expectations Hypotheses in the Monetary Analysis of Hyperinflations», Oxford Economic Papers, 33, pp. 61-80.

Georgoutsos, D.A., and G.P. Kouretas (2004), «A Multivariate I (2) Cointegration Analysis of German Hyperinflation», Applied Financial Economics, 14, pp. 29-41.

Gutierrez, M.J., and J. Vazquez (2004), «Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the Use of Money», Journal of Institutional and Theoretical Economics, 160, pp. 311-338.

Hanke, S.H., and A.K.F. Kwok (2009), «On the Measurement of Zimbabwe’s Hyperinflation», Cato Journal, 29, pp. 353-364.

Kiguel, M. (1989), «Budgets Deficits, Stability and the Monetary Dynamics of Hyperinflation», Journal of Money, Credit and Banking, 21, pp. 148-157.

Kingston, G.H. (1982), «The Semi-log Portfolio Balance Schedule is Tenuous», Journal of Monetary Economics, 9, pp. 389-399.

Marcet, A., and Nicolini J.P. (2003), «Recurrent Hyperinflation and Learning», American Economic Review, 93, pp. 1476-1498.

Obstfeld, M., and K. Rogoff (1983), «Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out», Journal of Political Economy, 91, pp. 675-687.

Petrovic, P., and Z. Mladenovic (2000), «Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia», Journal of Money, Credit and Banking, 32, pp. 785-806.

Pilossof, R. (2009), «’Dollarization’ in Zimbabwe and the Death of an Industry», Review of African Political Economy, 36, pp. 294-299.

Scheinkman, J. (1980), «Discussion», in Kareken J. and Wallace N. (eds.), Models of Monetary Economies, Minneapolis, Federal Reserve Bank of Minneapolis, pp. 91-96.

Slavova, S. (2003), «Money Demand during Hyperinflation and Stabilization: Bulgaria, 1991-2000», Applied Economics, 35, pp.1303-1316.

Sokic, A. (2010), «Modelling the Transaction Role of Money and the Essentiality of Money in an Explosive Hyperinflation Context», forthcoming in Journal of Institutional and Theoretical Economics.

Sturzenegger, F.A. (1994), «Hyperinflation with Currency Substitution: Introducing an Indexed Currency», Journal of Money, Credit, and Banking, 26, pp. 377-395.

Vazquez, J. (1998), «How High Can Inflation Get During Hyperinflation? A Transaction Cost Demand for Money Approach», European Journal of Political Economy, 14, pp. 433-451.

Walsh, C.E. (2003), Monetary Theory and Policy, Second Edition, Cambridge, The MIT Press.

Webb, S.B. (1989), Hyperinflation and Stabilization in Weimar Germany, Oxford University Press: New York.