Cagan’s paradox and money demand in hyperinflation: Revisited at daily frequency

• Published in: Journal of international money and finance Vol. 29; no. 7; pp. 1369 - 1384
• Main Authors: Mladenovic, Zorica, Petrovic, Pavle
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.11.2010; Elsevier; Elsevier Science Ltd
• Series: Journal of International Money and Finance
• Subjects: Anti-inflation policy; Cagan’s paradox; Daily frequency; Econometric models; Economic theory; Elasticity of demand; Estimating techniques; Hyperinflation; Hyperinflation Money demand Cagan's paradox Daily frequency; Inflation; Inflation controls; Monetary economics; Monetary policy; Money demand; Serbia; Studies; Hyperinflation; Cagan’s paradox; E 31; E 41; E 51; Money demand; Daily frequency
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2010.05.005

Using daily data the Cagan money demand is estimated and accepted for the most severe portion of Serbia’s 1992–1993 hyperinflation, i.e. its last 6 months. An implication is that the public adjusted daily throughout this extreme period. Moreover, the obtained semi-elasticity estimates are by far lower than those previously found using monthly data sets. Consequently, the daily estimates reject the longstanding Cagan’s paradox, based on monthly studies, by showing that the economy has been on the correct, increasing side of the Laffer curve almost through the end of hyperinflation. This strongly supports the view that hyperinflation is triggered and driven all way through its end by the government’s hunt for non-decreasing seigniorage. Daily adjustments of public in hyperinflation can account for the difference between the results obtained at daily and monthly frequencies, calling into question the latter. Some evidence is offered that the findings of this paper may hold for other hyperinflations.