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Anticipated Inflation, Real Disturbances and Money Demand: The Case of Chinese Hyperinflation, 1946-49

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Listed:
  • Ellis W. Tallman

    (Research Officer and Senior Eonomist Federal Reserve Bank of Atlanta)

  • De-piao Tang

    (Hong Kong University of Science and Technology)

  • Ping Wang

    (Department of Economics, Vanderbilt University)

Abstract

This paper re-examines the dynamics of hyperinflation extending the standard Cagan framework. In our theoretical model, we allow the relative price of capital goods in units of consumption goods to vary in order to examine 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-WWII Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflations overlook important nonlinear interactions between real and monetary activities, and hence, underestimate the true welfare costs of hyperinflation.

Suggested Citation

  • Ellis W. Tallman & De-piao Tang & Ping Wang, 2001. "Anticipated Inflation, Real Disturbances and Money Demand: The Case of Chinese Hyperinflation, 1946-49," Vanderbilt University Department of Economics Working Papers 0134, Vanderbilt University Department of Economics, revised Dec 2001.
    • Handle: RePEc:van:wpaper:0134
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    References listed on IDEAS

    as
    1. 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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    10. 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.
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