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The Demand and Supply of Money Under High Inflation: Brazil 1974/94

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  • Octávio A. F. Tourinho

Abstract

A specification for the demand for money in economies where inflation is high and stochastic is presented. It uses a generalized functional form and includes the variance of the inflation rate as an explanatory variable, and is estimated for Brazil in the period 1974/94 under the assumption that the monetary policy is passive and that expectations are adaptive. The supply of money is then specified as a generalization to a stochastic environment of the rule proposed by Sargent and Wallace (1973). The money demand and supply equations are then estimated simultaneously, under rational expectations, by using the Johansen (1991) (VEC) procedure and interpreting the two cointegrating vectors which arise as the supply and demand equations. The restrictions suggested by the hypothesized theoretical models for the money market equilibrium in high inflation processes are tested and accepted for this data. Apresenta-se neste artigo uma especificação para o equilíbrio monetário em uma economia onde a taxa de inflação é elevada e estocástica. A equação de demanda por moeda utiliza a forma funcional generalizada de Box-Cox e inclui a variância da inflação como uma variável explicativa. A oferta de moeda é especificada como uma generalização para o ambiente estocástico da regra proposta por Sargent e Wallace. O sistema de equações é estimado para os dados brasileiros do período 1974/94 de dois modos. Primeiro, a sua forma reduzida é estimada sob a hipótese de que a política monetária é passiva e de que as expectativas são adaptativas Em seguida, ele é estimado em sua forma estrutural, sob a hipótese de que as expectativas são racionais, usando o procedimento VEC de Johansen. Argumenta-se que os dois vetores de cointegração que são obtidos podem ser interpretados como representações das equações de oferta e demanda de moeda. Finalmente, as restrições extraídas dos modelos teóricos apresentados na primeira parte do artigo para caracterizar o equilíbrio de mercado sob condições de inflação elevada são aceitas no teste empírico do modelo para estes dados.

Suggested Citation

  • Octávio A. F. Tourinho, 2015. "The Demand and Supply of Money Under High Inflation: Brazil 1974/94," Discussion Papers 0068, Instituto de Pesquisa Econômica Aplicada - IPEA.
  • Handle: RePEc:ipe:ipetds:0068
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    References listed on IDEAS

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    1. Fair, Ray C, 1987. "International Evidence on the Demand for Money," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 473-480, August.
    2. Spitzer, John J, 1976. "The Demand for Money, the Liquidity Trap, and Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(1), pages 220-227, February.
    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. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Gerlach, Stefan & Nadal de Simone, Francisco, 1985. "A money demand equation for Brazil : Comments and additional evidence," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 493-501, August.
    6. Salemi, Michael K & Sargent, Thomas J, 1979. "The Demand for Money during Hyperinflation under Rational Expectations: II," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 741-758, October.
    7. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-350, June.
    8. Barro, Robert J, 1970. "Inflation, the Payments Period, and the Demand for Money," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1228-1263, Nov.-Dec..
    9. Cardoso, Eliana A., 1983. "A money demand equation for Brazil," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 183-193.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    11. Darrat, Ali F., 1985. "The demand for money in Brazil : Some further results," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 485-491, August.
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