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Anticipated Inflation, Real Disturbances and Money Demand: The Case of Chinese Hyperinflation, 1946-49

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Listed:
  • Ellis W. Tallman

    () (Research Officer and Senior Eonomist Federal Reserve Bank of Atlanta)

  • De-piao Tang

    (Hong Kong University of Science and Technology)

  • Ping Wang

    () (Department of Economics, Vanderbilt University)

Abstract

This paper re-examines the dynamics of hyperinflation extending the standard Cagan framework. In our theoretical model, we allow the relative price of capital goods in units of consumption goods to vary in order to examine interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post-WWII Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflations overlook important nonlinear interactions between real and monetary activities, and hence, underestimate the true welfare costs of hyperinflation.

Suggested Citation

  • Ellis W. Tallman & De-piao Tang & Ping Wang, 2001. "Anticipated Inflation, Real Disturbances and Money Demand: The Case of Chinese Hyperinflation, 1946-49," Vanderbilt University Department of Economics Working Papers 0134, Vanderbilt University Department of Economics, revised Dec 2001.
  • Handle: RePEc:van:wpaper:0134
    as

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    References listed on IDEAS

    as
    1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    2. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-562, November.
    3. 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.
    4. Rogers, John H & Wang, Ping, 1993. "Sources of Fluctuations in Relative Prices: Evidence from High Inflation Countries," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 589-605, November.
    5. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-670, September.
    6. Policano, Andrew J. & Choi, Eun Kwan, 1978. "The effects of relative price changes on the household's demand for money," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 743-753, November.
    7. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    9. Clements, Kenneth W & Nguyen, Phuong, 1980. "Money Demand, Consumer Demand and Relative Prices in Australia," The Economic Record, The Economic Society of Australia, vol. 56(155), pages 338-346, December.
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