Monetary Hyperinflations, Speculative Hyperinflations and Modeling the Use of Money

Alexandre Sokic

The IUP Journal of Monetary Economics, 2008, vol. VI, issue 3, 51-70

Abstract: The aim of this paper is to clarify the failure of the Cagan model with perfect foresight, and to draw new axes for the investigation of monetary hyperinflation analysis. Firstly, the paper evaluates the relevance of the Cagan ad hoc model with perfect foresight as a theoretical framework for investigating hyperinflation processes. It is shown that deficits can never generate monetary hyperinflations, confirming the results of Buiter (1987). The only hyperinflationary processes that can occur are speculative hyperinflations. Secondly, the paper assesses the consistency of hyperinflationary paths with the optimizing behavior of representative agents within two perfect foresight inflationary finance framework, modeling the use of money as a medium of exchange. In the context of a money-in-the-utility framework, the results obtained in the Cagan ad hoc model with perfect foresight are founded and confirmed. This implies restricting the use of the latter model only to speculative hyperinflations analysis. In the context of a transaction costs based model, it has been shown that deficits can generate monetary hyperinflations. Moreover, speculative hyperinflations remain possible. This result is in sharp contrast to that of the money-in-the-utility framework and implies a demand for money, different from the Cagan form.

Date: 2008
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