Hyperinflation and the Dynamics of the Demand for Money in China, 1945-1949.

This paper is to study the demand for money during the Chinese inflation of 1945-49. Based on the Chinese experience, the results confirm the hypothesis that during hyperinflation the expected rate of change in prices is the most important variable in the demand function for money. The estimated value of the coefficient of cash balances adjustment close is close to one. Thus, the assumption that the desired level of real cash balances tends to equal the actual level during hyperinflation is supported. This study, based on the Chinese experience, confirms the hypothesis that, during hyperinflation the expected rate of change in prices is the most important variable in the demand function for money (Cagan 1956). Although the velocity of money increased during the hyperinflation, the demand function for money is predictable if the model includes the variable of the expected rate of change in prices. Furthermore, the magnitudes of the parameters in the estimated demand function indicate that the hyperinflation in China was not self-generating, that is, independent of money supply. This study has also investigated the assumption of a lag in the adjustment of real cash balances through the process of hyperinflation. The empirical findings suggest that the value of the coefficient of adjustment is close to one. Thus, the assumption that the desired level of real cash balances tends to equal the actual level during hyperinflation is supported. [ABSTRACT FROM AUTHOR]