Nominal and Real Disturbances and Money Demand in the Chinese Hyperinflation

Ellis W. Tallman, De-piao Tang, and Ping Wang
Working Paper 2002-4
April 2002

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This paper reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post-World War II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation.

JEL classification: E31, E41

Key words: hyperinflation, money demand

The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Ellis W. Tallman, assistant vice president and senior economist, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8915, 404-498-8956 (fax),; De-piao Tang, associate professor of economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, 852-2358-7597, 852-2335-0744 (fax),; or Ping Wang, professor of economics, Vanderbilt University, and research associate, National Bureau of Economic Research, Department of Economics, Vanderbilt University, 214 Calhoun Hall, Nashville, Tennesssee 37235, 615-322-2388, 615-343-8495,