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Inflation Tax and Substitution Between Domestic and Foreign Assets: Evidence from Central‐Eastern Europe
Author(s) -
Miljkovic Dragan
Publication year - 2001
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00113
Subject(s) - economics , inflation (cosmology) , monetary economics , currency substitution , incentive , inflation tax , substitution (logic) , real interest rate , macroeconomics , monetary policy , exchange rate , market economy , physics , theoretical physics , computer science , programming language , devaluation
Dominant factors in determining real money holdings in Poland, Hungary, and Slovenia during a transition period characterized by high inflation are analyzed. Two hypotheses are tested. Cagan’s model suggests that inflation‐adjusted money balances are influenced almost exclusively by inflationary expectations. A competing model suggests that under highly inflationary conditions there is an incentive for agents to substitute foreign for domestic assets in their portfolios because of the higher expected return. Inflation expectation is a dominant factor in Poland. The expected return to holding foreign assets dominates in Hungary. Both factors have played important roles in Slovenia.