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Modelling the transaction role of money and the essentiality of money in a hyperinflation context

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  • Alexandre Sokic

Abstract

This paper uses an analytical approach and the precise definition of money essentiality given by Scheinkman (1980) with the aim to establish a formal theoretical link between the possibility of hyperinflationary paths and the concept of money essentiality. In this respect the paper contributes to the understanding of the well known failure of Cagan based inflationary finance models to produce explosive hyperinflation. We consider two standard optimizing monetary models representing alternative ways of modelling the transaction role of money. The paper considers a money-in-the-utility-function model and a cash-in-advance model where representative agent’s preferences are represented by general utility functions. We show that modelling monetary hyperinflation with perfect foresight is closely linked to the concept of money essentiality as defined by Scheinkman (1980). The possibility of explosive monetary hyperinflation in a perfect foresight inflationary finance model always relies on a sufficient level of money essentiality. The main contribution of this paper is to show that, whether in a cash-in-advance or in a money-in-the-utility-function framework, this sufficient level of money essentiality does not depend on the specific way, cash-in-advance or moneyin- the-utility-function, of modelling the role of money as a medium of exchange.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2008-12.

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Date of creation: 2008
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Handle: RePEc:ulp:sbbeta:2008-12

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Keywords: monetary hyperinflation; inflation tax; money essentiality.;

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  1. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
  2. Casella, Alessandra & Feinstein, Jonathan S, 1990. "Economic Exchange during Hyperinflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(1), pages 1-27, February.
  3. Vázquez Pérez, Jesús & Gutiérrez Huerta, María José, 2002. "Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the use of Money," DFAEII Working Papers 2002-27, University of the Basque Country - Department of Foundations of Economic Analysis II.
  4. Tang, D.P. & Wang, P., 1993. "On Relative Price Variability and Hyperinflation," Papers, Pennsylvania State - Department of Economics 5-93-5, Pennsylvania State - Department of Economics.
  5. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 353-74, May.
  6. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 1(2), pages 133-150, April.
  7. Evans, J Lynne, 1995. "The Demand for Money: Hyperinflation or High Inflation Traps," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 63(0), pages 49-56, Suppl..
  8. Vazquez, Jesus, 1998. "How high can inflation get during hyperinflation? A transaction cost demand for money approach," European Journal of Political Economy, Elsevier, vol. 14(3), pages 433-451, August.
  9. de Holanda Barbosa, Fernando & Barros da Cunha, Alexandre, 2003. "Inflation tax and money essentiality," Economics Letters, Elsevier, vol. 78(2), pages 187-195, February.
  10. Evans, Jean Lynne & Yarrow, George Keith, 1981. "Some Implications of Alternative Expectations Hypotheses in the Monetary Analysis of Hyperinflations," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 61-80, March.
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