Working Paper BETA #2008-13

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Title : Theoretical support for a new class of demand for real cash balances in explosive hyperinflations.

Author(s) : Alexandre Sokic

Abstract : This paper aims at providing some new theoretical support for money demand functions in monetary hyperinflation analysis given the well known failure of Cagan based inflationary finance models to produce explosive hyperinflation. An analytical approach is used to characterize the agents’ preferences which are compatible with monetary hyperinflation. In the context of a MIUF model, we show that the possibility of explosive hyperinflation paths depends on a sufficient level of money essentiality in the sense of Scheinkman (1980) which is conveyed by the agents’ preferences. This result emerges without any ad-hoc assumption implying the inclusion of some friction in the adjustment of some nominal variable. It suggests that monetary hyperinflation analysis under perfect foresight requires abandoning the Cagan money demand and adopting a demand for money respecting money essentiality. Theoretical support is brought to inelastic functional forms of money demand and specifically to the double-log schedule.

Key-words : money demand, monetary hyperinflation, inflation tax, money essentiality.

JEL Classification : E31, E41