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Nominal and Real Disturbances and Money Demand in Chinese Hyperinflation

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  • Ellis W. Tallman
  • De-Piao Tang
  • Ping Wang

Abstract

This article reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post--WW II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation. Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 41 (2003)
Issue (Month): 2 (April)
Pages: 234-249

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Handle: RePEc:oup:ecinqu:v:41:y:2003:i:2:p:234-249

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References

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  1. Rogers, J.H. & Wang, P., 1990. "Sources of Fluctuations in Relative Prices: Evidence from High Inflation Countries," Papers 12-90-2, Pennsylvania State - Department of Economics.
  2. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  3. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-62, November.
  4. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-70, September.
  5. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  6. Peter M. Garber, 1981. "Transition from Inflation to Price Stability," NBER Working Papers 0728, National Bureau of Economic Research, Inc.
  7. Tang, D.P. & Wang, P., 1993. "On Relative Price Variability and Hyperinflation," Papers 5-93-5, Pennsylvania State - Department of Economics.
  8. Abel, Andrew & Dornbusch, Rudiger & Huizinga, John & Marcus, Alan, 1979. "Money demand during hyperinflation," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 97-104, January.
  9. Clements, Kenneth W & Nguyen, Phuong, 1980. "Money Demand, Consumer Demand and Relative Prices in Australia," The Economic Record, The Economic Society of Australia, vol. 56(155), pages 338-46, December.
  10. Casella, Alessandra & Feinstein, Jonathan S, 1990. "Economic Exchange during Hyperinflation," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 1-27, February.
  11. Policano, Andrew J. & Choi, Eun Kwan, 1978. "The effects of relative price changes on the household's demand for money," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 743-753, November.
  12. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  13. Tallman, Ellis W. & Wang, Ping, 1995. "Money demand and the relative price of capital goods in hyperinflations," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 375-404, November.
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Cited by:
  1. Richard C.K. Burdekin & Hsin-hui I. H. Whited, 2001. "Exporting Hyperinflation: The Long Arm of Chiang Kai-shek," Claremont Colleges Working Papers 2001-18, Claremont Colleges.
  2. Kia, Amir & Darrat, Ali F., 2007. "Modeling money demand under the profit-sharing banking scheme: Some evidence on policy invariance and long-run stability," Global Finance Journal, Elsevier, vol. 18(1), pages 104-123.

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