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Nominal and Real Disturbances and Money Demand in Chinese Hyperinflation
Author(s) -
Tallman Ellis W.,
Tang DePiao,
Wang Ping
Publication year - 2003
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbg004
Subject(s) - economics , hyperinflation , monetary economics , inflation (cosmology) , demand for money , monetary policy , demand curve , price level , relative price , consumption (sociology) , macroeconomics , microeconomics , econometrics , social science , physics , sociology , theoretical physics
This article reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects 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–WW II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation.