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Theoretical support for a new class of demand for real cash balances in explosive hyperinflations

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Alexandre Sokic

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Abstract

This paper aims at providing some new theoretical support for money demand functions in monetary hyperinflation analysis given the well known failure of Cagan based inflationary finance models to produce explosive hyperinflation. An analytical approach is used to characterize the agents’ preferences which are compatible with monetary hyperinflation. In the context of a MIUF model, we show that the possibility of explosive hyperinflation paths depends on a sufficient level of money essentiality in the sense of Scheinkman (1980) which is conveyed by the agents’ preferences. This result emerges without any ad-hoc assumption implying the inclusion of some friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality. Theoretical support is brought to inelastic functional forms of money demand and specifically to the double-log schedule.

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Paper provided by Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg in its series Working Papers of BETA with number 2008-13.

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Date of creation: 2008
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Handle: RePEc:ulp:sbbeta:2008-13

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Related research
Keywords: money demand; monetary hyperinflation; inflation tax; money essentiality.;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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  1. 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. [Downloadable!] (restricted)
  2. Fernando Barbosa & Alexandre Cunha & Elvia Sallum, 2006. "Competitive equilibrium hyperinflation under rational expectations," Economic Theory, Springer, vol. 29(1), pages 181-195, September. [Downloadable!] (restricted)
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  3. Tang, D.P. & Wang, P., 1993. "On Relative Price Variability and Hyperinflation," Papers 5-93-5, Pennsylvania State - Department of Economics.
    Other versions:
  4. Evans, J Lynne, 1995. "The Demand for Money: Hyperinflation or High Inflation Traps," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 63(0), pages 49-56, Suppl..
  5. Bruno, Michael, 1989. "Econometrics and the Design of Economic Reform," Econometrica, Econometric Society, vol. 57(2), pages 275-306, March. [Downloadable!] (restricted)
  6. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April. [Downloadable!] (restricted)
  7. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
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  8. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 353-74, May. [Downloadable!] (restricted)
  9. Ashworth, John & Evans, Lynne, 1998. "Functional Form of the Demand for Real Balances in Cagan's Hyperinflation Model," Applied Economics, Taylor and Francis Journals, vol. 30(12), pages 1617-23, December. [Downloadable!] (restricted)
  10. Mª Jose Gutierrez & Jesús Vazquez, 2003. "Explosive Hyperinflation, Inflation Tax Laffer Curve and Modelling the use of Money," DFAEII Working Papers 200227, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  11. 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. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. Cukierman, Alex, 1988. "Rapid inflation -- deliberate policy or miscalculation?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 11-75. [Downloadable!] (restricted)
  14. de Holanda Barbosa, Fernando & Barros da Cunha, Alexandre, 2003. "Inflation tax and money essentiality," Economics Letters, Elsevier, vol. 78(2), pages 187-195, February. [Downloadable!] (restricted)
  15. Kingston, Geoffrey H., 1982. "The semi-log portfolio balance schedule is tenuous," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 389-399. [Downloadable!] (restricted)
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