Money demand during hyperinflation: Cointegration, rational expectations, and the importance of money demand shocks

Money demand and price level dynamics are analyzed using data from three hyperinflation episodes which have received relatively little attention in previous literature: China (1946-1949); Hungary (1945-1946); and Yugoslavia-Serbia (1991-1993). The Cagan-models's ability to describe money demand during these hyperinflations is analyzed: Tests of cointegration and rational expectations restrictions are conducted, and explicit measures of the magnitude of money demand shocks are obtained. The results indicate that the Cagan model provides a valid description of money demand during the Chinese and Serbian hyperinflations, but not during the Hungarian hyperinflation. However, in the former two cases money demand shucks account for a substantial part of the variation in real balances.