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Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia

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  • Petrovic, Pavle
  • Mladenovic, Zorica

Abstract

A modified monetary model of exchange rate determination is advanced and tested for the Yugoslav hyperinflation of 1992-94, stating that the exchange rate is determined directly in the money market thus implying that private agents, due to "dollarization", denominate their real money holdings in foreign currency. Empirical evidence supports the advanced model. Apart from the last seven months of the Yugoslav hyperinflation, the exact RE present value model of the exchange rate is accepted, while that of the price level is rejected. For the whole period of hyperinflation the modified money demand schedule, with money holdings denominated in foreign currency, is nonlinear with decreasing semielasticity of money demand.

Suggested Citation

  • Petrovic, Pavle & Mladenovic, Zorica, 2000. "Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 785-806, November.
    • Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:4:p:785-806
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    Cited by:

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    2. Sokic Alexandre, 2012. "The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money," German Economic Review, De Gruyter, vol. 13(2), pages 142-160, May.
    3. Nikolay Nenovsky, 2010. "Monetary Regimes In Post-Communist Countries Some Long-Term Reflections," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice (1954-2015), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 57, pages 217-234, november.
    4. Engsted, Tom, 2003. "Misspecification versus bubbles in hyperinflation data: comment," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 441-451, August.
    5. Stefka Slavova, 2003. "Money demand during hyperinflation and stabilization: Bulgaria, 1991-2000," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1303-1316.
    6. Luca Benati, 2018. "Cagan s Paradox Revisited," Diskussionsschriften dp1826, Universitaet Bern, Departement Volkswirtschaft.
    7. Dario Cziráky & Max Gillman, 2006. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Bulletin of Economic Research, Wiley Blackwell, vol. 58(2), pages 105-127, April.
    8. Zorica Mladenovic & Bent Nielsen, 2009. "The role of income in money demand during hyper-inflation: the case of Yugoslavia," Economics Papers 2009-W02, Economics Group, Nuffield College, University of Oxford.
    9. Mladenovic, Zorica & Petrovic, Pavle, 2010. "Cagan's paradox and money demand in hyperinflation: Revisited at daily frequency," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1369-1384, November.
    10. Rolando Gonzales Martínez, 2013. "Modeling Hyperinflation Phenomenon: A Bayesian Approach," Documentos de Investigación - Research Papers 8, CEMLA.
    11. Miller, Stephen Matteo & Ndhlela, Thandinkosi, 2020. "Money demand and seignorage maximization before the end of the Zimbabwean dollar," Journal of Macroeconomics, Elsevier, vol. 63(C).
    12. Chen, Show-Lin & Tsai, Li-Ju & Wu, Jyh-Lin, 2004. "A revisit to liquidity effects--evidence from a non-linear approach," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 501-517, September.
    13. Milojko Arsic & Zorica Mladenovic & Pavle Petrovic, 2001. "Macroeconomic Stabilization in the FRY," wiiw Balkan Observatory Working Papers 9, The Vienna Institute for International Economic Studies, wiiw.

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