Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia

Pavle Petrovic and Zorica Mladenovic

Journal of Money, Credit and Banking, 2000, vol. 32, issue 4, 785-806

Abstract: A modified monetary model of exchange rate determination is advanced and tested for the Yugoslav hyperinflation of 1992-94, stating that the exchange rate is determined directly in the money market thus implying that private agents, due to "dollarization", denominate their real money holdings in foreign currency. Empirical evidence supports the advanced model. Apart from the last seven months of the Yugoslav hyperinflation, the exact RE present value model of the exchange rate is accepted, while that of the price level is rejected. For the whole period of hyperinflation the modified money demand schedule, with money holdings denominated in foreign currency, is nonlinear with decreasing semielasticity of money demand.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:32:y:2000:i:4:p:785-806

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