 How High can Inflation Get During Hyperinflation? A Liquidity Costs Demand for Money ApproachThe Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Abstract: Two micro-founded demand functions for money are derived. One of them is Cagan's demand for money which implies the possibility of dual steady states and a high-inflation trap. Around the high-inflation steady state real money balances and inflation change slowly. The other money demand function which is obtained by assuming liquidity costs of the type in the Baumol-Tobin model, implies that there is a single steady state, therefore there is no possibility of a high-inflation trap. The steady state is unstable. Along the hyperinflationary path real money balances decrease and inflation increases, both at an increasing rate. By imposing a lower bound for per capita consumption allowing the hyperinflationary path to be feasible, we show that the inflation rate reaches a higher upper bound when the country is less financially developed and government expenditure is smaller. Keywords: Hyperinflationary dynamics; liquidity costs; currency reform (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:431 Access Statistics for this paper More papers in The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics Contact information at EDIRC. |
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