Inflation Tax and Substitution Between Domestic and Foreign Assets: Evidence from Central‐Eastern Europe

Dragan Miljkovic

Review of Development Economics, 2001, vol. 5, issue 1, 145-150

Abstract: Dominant factors in determining real money holdings in Poland, Hungary, and Slovenia during a transition period characterized by high inflation are analyzed. Two hypotheses are tested. Cagan’s model suggests that inflation‐adjusted money balances are influenced almost exclusively by inflationary expectations. A competing model suggests that under highly inflationary conditions there is an incentive for agents to substitute foreign for domestic assets in their portfolios because of the higher expected return. Inflation expectation is a dominant factor in Poland. The expected return to holding foreign assets dominates in Hungary. Both factors have played important roles in Slovenia.

Date: 2001
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