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How High Can Inflation Get During Hyperinflation? A Liquidity Costs Demand For Money Approach

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  • Vazquez, Jesus

Abstract

Two micro-founded demand functions for money are derived. One of them is Cagan's demand for money which implies the possibility of dual steady states and a high-inflation trap. Around the high-inflation steady state real money balances and inflation change slowly. The other money demand function which is obtained by assuming liquidity costs of the type in the Baumol-Tobin model, implies that there is a single steady state, therefore there is no possibility of a high-inflation trap. The steady state is unstable. Along the hyperinflationary path real money balances decrease and inflation increases, both at an increasing rate. By imposing a lower bound for per capita consumption allowing the hyperinflationary path to be feasible, we show that the inflation rate reaches a higher upper bound when the country is less financially developed and government expenditure is smaller.
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  • Vazquez, Jesus, 1994. "How High Can Inflation Get During Hyperinflation? A Liquidity Costs Demand For Money Approach," Economic Research Papers 268649, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:268649
    DOI: 10.22004/ag.econ.268649
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    Keywords

    Agricultural and Food Policy; Financial Economics;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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