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Money Demand and Inflation in Transition Economy

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  • Maria Garvalova

Abstract

We investigate the possibility that the observed deviations of the money demand and of the price changes can be explained by the rational expectations Cagan’s inflation model in the specific case of the transition economy in Bulgaria. We examine the time series properties of the monthly data for the period from January 1991 to December 1996. The validity of Cagan’s inflation model is tested using an econometric technique independent of the assumptions concerning expectations formation. We are able to reject the null hypothesis of no co-integration confirming validity of the model for the sub-period from January 1995 to December 1996. Both lagged rates of money growth and lagged inflation rates are used for instrumental variables estimation of the rational expectations model.

Suggested Citation

  • Maria Garvalova, 1998. "Money Demand and Inflation in Transition Economy," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 195-203.
  • Handle: RePEc:bas:econst:y:1998:i:2:p:195-203
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    References listed on IDEAS

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    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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    3. Taylor, Mark P, 1991. "The Hyperinflation Model of Money Demand Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 327-351, August.
    4. Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 24-58, February.
    5. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-770, August.
    6. Schotman, Peter & van Dijk, Herman K., 1991. "A Bayesian analysis of the unit root in real exchange rates," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 195-238.
    7. Frenkel, Jacob A. & Taylor, Mark P., 1993. "Money demand and inflation in Yugoslavia 1980-1989," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 455-481.
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