MONEY DEMAND DURING HYPERINFLATION AND STABILIZATION - BOLIVIA, 1980-1988

This paper examines the demand for money in Bolivia during the 1980s, a decade of extreme instability with annual inflation rates reaching o ver 20,000 percent, and a subsequent stabilization, with annual rates falling to less than 25 percent and remaining so for more than five ye ars. Our empirical analysis makes use of error-correction approaches, time-varying-parameter estimation with Kalman filtering, and GARCH mod els of expected inflation and inflation variance. We find that expecte d inflation and inflation uncertainty both matter for money demand. Ti me-varying estimates show that the reaction to monetary disequilibria was significantly faster during hyperinflation.