The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s

This paper employs cointegration techniques to examine three recent hyperinflationary episodes in transition economies, which, with the exception of Russia (1992-1994), have been largely overlooked in the literature. More specifically, these episodes include Bulgaria during 1995-1997 and Ukraine during 1993-1995. We use the well-known maximum likelihood estimator due to Johansen (1988, 1991) and Stock and Watson's (1993) dynamic ordinary least squares (DOLS) estimator to complement each other and obtain consistent estimates of the semi-elasticity of real money demand with respect to inflation. The empirical results obtained in this study support the Cagan model of money demand in the East European hyperinflation experiences of the 1990s. However, our results do not indicate that the rational expectations hypothesis holds during these episodes. In addition, we also test the hypothesis that monetary policy in these three hyperinflations was conducted with the sole intent of maximizing the inflation tax revenue for the government.