MONEY DEMAND DURING HYPERINFLATION - COINTEGRATION, RATIONAL-EXPECTATIONS, AND THE IMPORTANCE OF MONEY DEMAND SHOCKS

Money demand and price level dynamics are analyzed using data from thr ee hyperinflation episodes which have received relatively little atten tion in previous literature: China (1946-1949); Hungary (1945-1946); a nd Yugoslavia-Serbia (1991-1993). The Cagan-models's ability to descri be money demand during these hyperinflations is analyzed: Tests of coi ntegration and rational expectations restrictions are conducted, and e xplicit measures of the magnitude of money demand shocks are obtained. The results indicate that the Cagan model provides a valid descriptio n of money demand during the Chinese and Serbian hyperinflations, but not during the Hungarian hyperinflation. However, in the former two ca ses money demand shucks account for a substantial part of the variatio n in real balances.