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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
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    References listed on IDEAS

    as
    1. Garber, Peter M., 1982. "Transition from inflation to price stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 11-42, January.
    2. 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.
    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. 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.
    5. Kenneth W. Clements & Phuong Nguyen, 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.
    6. 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.
    7. repec:bla:ecorec:v:56:y:1980:i:155:p:338-46 is not listed on IDEAS
    8. 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.
    9. 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.
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