Functional form of the demand for real balances in Cagan's hyperinflation model

This paper uses recent advances in the development of testable implications of the Cagan model of hyperinflation. It extends the range of candidate fu nctional forms of the demand for real balances in hyperinflations to includ e nonstandard versions in which the absolute inflation elasticity is a decr easing function of inflation. These nonstandard functional forms are of int erest because they are known to have desirable theoretical properties. This paper finds empirical justification for a nonstandard form that performs a t least as well as the traditional semilogarithmic functional form.