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The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s

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Atanas Christev

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Abstract

This paper employs cointegration techniques to examine three recent hyperinflationary episodes in transition economies, which, with the exception of Russia (1992-1994), have been largely overlooked in the literature. More specifically, these episodes include Bulgaria during 1995-1997 and Ukraine during 1993-1995. We use the well-known maximum likelihood estimator due to Johansen (1988, 1991) and Stock and Watson's (1993) dynamic ordinary least squares (DOLS) estimator to complement each other and obtain consistent estimates of the semi-elasticity of real money demand with respect to inflation. The empirical results obtained in this study support the Cagan model of money demand in the East European hyperinflation experiences of the 1990s. However, our results do not indicate that the rational expectations hypothesis holds during these episodes. In addition, we also test the hypothesis that monetary policy in these three hyperinflations was conducted with the sole intent of maximizing the inflation tax revenue for the government.

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Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0507.

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Date of creation: 2005
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Handle: RePEc:hwe:certdp:0507

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Related research
Keywords: Cagan cointegration inflation tax transition economies stabilizations

Find related papers by JEL classification:
C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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