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Monetary hyperinflations, speculative hyperinflations and modelling the use of money

  • Alexandre Sokic

The aim of this paper is to clarify the failure of the Cagan model with perfect foresight and to draw new axes for investigation of monetary hyperinflation analysis. Firstly, the paper evaluates the relevancy of the Cagan ad-hoc model with perfect foresight as a theoretical framework for investigating hyperinflation processes. We show that deficits can never generate monetary hyperinflations, confirming the results of Buiter (1987). The only hyperinflationary processes that can occur are speculative hyperinflations. Secondly, the paper assesses consistency of hyperinflationary paths with the optimizing behaviour of representative agents within two perfect foresight inflationary finance frameworks modelling the use of money as a medium of exchange. In the context of a money-in-the-utility framework, the results obtained in the Cagan ad-hoc model with perfect foresight are founded and confirmed. This implies restricting the use of the latter model only to speculative hyperinflations analysis. In the context of a transaction costs based model, we show that deficits can generate monetary hyperinflations. Moreover, speculative hyperinflations remain possible. This result is in sharp contrast to that of the money-in-the-utility framework and implies a demand for money different from the Cagan form.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2007-05.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ulp:sbbeta:2007-05
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  1. Dimitris Georgoutsos & Georgios Kouretas, 2004. "A Multivariate I(2) cointegration analysis of German hyperinflation," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 29-41.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August.
  3. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  4. Petrovic, Pavle & Mladenovic, Zorica, 2000. "Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 785-806, November.
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  8. María-José Gutiérrez & Jesús Vázquez, 2004. "Explosive Hyperinflation, Inflation-Tax Curve, and Modeling the Use of Money," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(2), pages 311-, June.
  9. Sargent, Thomas J, 1977. "The Demand for Money During Hyperinflations under Rational Expectations: I," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 59-82, February.
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  11. Evans, Jean Lynne & Yarrow, George Keith, 1981. "Some Implications of Alternative Expectations Hypotheses in the Monetary Analysis of Hyperinflations," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 61-80, March.
  12. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
  13. 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.
  14. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  15. 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 328-50, June.
  16. Cukierman, Alex, 1988. "Rapid inflation -- deliberate policy or miscalculation?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 11-75.
  17. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
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