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Economic Exchange during Hyperinflation

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  • Casella, Alessandra
  • Feinstein, Jonathan S

Abstract

The authors construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange. In their model, buyers must carry cash while shopping, and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good. Since buyers face the constant threat of incoming younger (hence richer) customers, their bargaining position is weakened by inflation, allowing sellers to extract a higher real price. However, they show that higher inflation also reduces buyers' search, increasing sellers' wait for customers. As a result, the volume of transactions concluded in the decentralized sector falls. At high enough rates of inflation, all agents suffer a welfare loss. Copyright 1990 by University of Chicago Press.

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jpolec:v:98:y:1990:i:1:p:1-27
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    Citations

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    Cited by:

    1. Pablo Druck & Pietro Garibaldi, 2000. "Inflation Risk and Portfolio Allocation in the Banking System," CEMA Working Papers: Serie Documentos de Trabajo. 181, Universidad del CEMA.
    2. Tommasi, Mariano, 1999. "On high inflation and the allocation of resources," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 401-421, December.
    3. Alexandre Sokic, 2008. "Modelling the transaction role of money and the essentiality of money in a hyperinflation context," Working Papers of BETA 2008-12, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Mondino, Guillermo & Sturzenegger, Federico & Tommasi, Mariano, 1996. "Recurrent High Inflation and Stabilization: A Dynamic Game," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 981-996, November.
    5. 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.
    6. Jones, L.E. & Manuelli, R.E, 1997. "Policy Uncertainty and Informational Monopolies: The Case of Monetary Policy," Working papers 9715, Wisconsin Madison - Social Systems.
    7. Zhao, Liuyan, 2017. "The behavior of money demand in the Chinese hyperinflation," China Economic Review, Elsevier, vol. 42(C), pages 145-154.
    8. David McKenzie & Ernesto Schargrodsky, 2005. "Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis," Business School Working Papers buyinglessshop, Universidad Torcuato Di Tella.
    9. Jones, Larry E. & Manuelli, Rodolfo E., 2001. "Volatile Policy and Private Information: The Case of Monetary Shocks," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 265-296, July.
    10. Mariano Tommasi, 1996. "High inflation: resource misallocations and growth effects," Estudios de Economia, University of Chile, Department of Economics, vol. 23(2 Year 19), pages 157-177, December.
    11. Melvyn Coles & Randall Wright, 1994. "Dynamic bargaining theory," Staff Report 172, Federal Reserve Bank of Minneapolis.
    12. Alexandre Sokic, 2008. "Theoretical support for a new class of demand for real cash balances in explosive hyperinflations," Working Papers of BETA 2008-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    13. Gutiérrez Huerta, María José & Vázquez Pérez, Jesús, 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.
    14. Ellis W. Tallman & De-Piao Tang & Ping Wang, 2003. "Nominal and Real Disturbances and Money Demand in Chinese Hyperinflation," Economic Inquiry, Western Economic Association International, vol. 41(2), pages 234-249, April.
    15. Jose De Gregorio & Federico Sturzenegger, 1994. "Credit Markets and the Welfare Costs of Inflation," NBER Working Papers 4873, National Bureau of Economic Research, Inc.
    16. De Gregorio, Jose & Sturzenegger, Federico, 1997. "Financial markets and inflation under imperfect information," Journal of Development Economics, Elsevier, vol. 54(1), pages 149-168, October.
    17. 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.
    18. De Gregorio, Jose, 1996. "Inflation, growth, and central banks : theory and evidence," Policy Research Working Paper Series 1575, The World Bank.
    19. Mariano Tommasi, 1992. "The Welfare Effects of Inflation, The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 655, UCLA Department of Economics.

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