the hyperinflation model of money demand revisited in this paper we propose a test of the hyperinflation model of money demand which is valid under any assumption concerning agents expectations subject only to the restriction that forecasting errors are stationary it is also demonstrated that highly efficient parameter estimates can be obtained and restrictions on them tested under the same weak assumption finally it is shown how these first stage estimates can be utilized to test the stronger assumption of rational expectations the arguments are illustrated by analysis of the classic data on european hyperinflations previously analyzed by cagan 1956 barro 1970 and abel dornbusch huizinga and marcus 1979 copyright 1991 by ohio state university press

resource degradation and adoption of land conservation technologies in the ethiopian highlands a case study in andit tid north shewa abstract this paper reports results from a study of resource degradation and conservation behavior of peasant households in a degraded part of the ethiopian highlands peasant households choice of conservation technologies is modeled as a two stage process recognition of the erosion problem and adoption and level of use of control practices an ordinal logit model is used to explain parcel level perception of the threat of the erosion problem and the extent of use of conservation practices results show the importance of perception of the threat of soil erosion household land and farm characteristics perception of technology specific attributes and land quality differentials in shaping conservation decisions of peasants furthermore where poverty is widespread and appropriate support policies are lacking results indicate that population pressure per se is unable to encourage sustainable land use the challenge of breaking the poverty environment trap and initiating sustainable intensification thus require policy incentives and technologies that confer short term benefits to the poor while conserving the resource base

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

banking development socioeconomic structure and income inequality abstract using rich unique data from the italian local credit markets provinces this paper investigates the impact of local banking development on income inequality and the role of the socioeconomic structure in this link exploiting the italian historical banking regulation to instrument for the local presence of bank branches we find that local banking development mitigates income inequality however the finance inequality nexus manifests itself only in relatively advanced areas when we study the structural channels of influence we uncover evidence that banking development can reduce inequality by affecting geographical mobility and urbanization while it has modest effects through the development of material infrastructures and human capital

money inflation and output in romania 1992 2000 abstract money inflation and output are tested for stationarity and found to be integrated of order one we apply the johansen procedure for cointegration to test for the rank of the matrix of cointegration relations one to test for the weak exogeneity of output accepted inflation rejected and money rejected we interpret the unique cointegrating relationship as an extended cagan money demand function we then estimate error correction mechanisms which explain the short run movements of real money and inflation the evidence suggests that in the period considered including the sub sample between the liberalization shocks inflation was largely a monetary phenomenon

modelling inflation in georgia the article explains the behaviour of inflation in georgia in the post stabilization period long run equation linking prices with money and exchange rate as well as short run dynamic equation for inflation are estimated the inflation equation is stable points to a dominant role of exchange rate in the inflation behaviour the equation explains well the behaviour of inflation after the russian crises when inflation increased sharply but was quickly brought under control when the national bank of georgia kept its monetary policy tight and exchange rate stable

financial development and financing constraints international evidence from the structural investment model this article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment the financing constraints are inferred from the investment euler equation by assuming that the firm s stochastic discount factor is a function of the firm s financial position specifically the stock of liquid assets the magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development the size effect business cycles and legal environment effects are also considered copyright 2003 oxford university press

co integration and error correction models the temporal causality between government taxes and spending several interesting papers have recently considered whether government taxes granger cause government spending or vice versa the findings based on standard granger 6 causality tests are not consistent manage and marlow 10 conclude that when evidence of one way causality exists federal taxes granger cause federal spending while anderson wallace and warner 1 conclude that the evidence supports one way causality in the opposite direction ram 11 reexamining the issue concludes that taxes granger cause spending at the federal level but that spending granger causes taxes at the state and local level von furstenberg green and jeong 13 in another related article examine the tax and spend spend and tax causality issue using a more general vector autoregressive var model they introduce in addition to federal taxes and spending two economic variables the gnp gap and the inflation rate decompose federal spending into several categories and remove the effects of automatic stabilizers when appropriate they find little evidence that taxes granger cause spending and limited evidence that spending causes taxes a finding which corresponds most closely to that of anderson wallace and warner 1 our purpose is to reconsider the causality issue with the aid of co integration and errorcorrection modeling our analysis illustrates with a specific example how sources of causality can be neglected in standard granger causality tests moreover addressing the question of temporal causality between government taxes and spending provides insight as to how different policies might or might not help control the growth of government the results of our estimating various co integration and error correction models with quarterly data suggest bi directional causality between government taxes and spending both for the federal and state and local sectors this finding counters the conclusions of previous studies when annual data are used however our

risks and returns from soil conservation evidence from low income farms in the philippines abstract this paper examines risks and returns associated with soil conservation on hillside farms in the philippines stochastic efficiency analysis is combined with a heteroskedastic regression model to assess the impacts of contour hedgerows on low income corn farms regression analysis indicates that over time contour hedgerows can improve yields up to 15 compared with conventional practices the analysis also provides weak support for a hypothesis that hedgerows are variance reducing however results show that the reduction in yield variability afforded by hedgerows is modest and that yield variability may increase by as much as 5 as hedgerow intensity rises tests for stochastic dominance show that compared with the conventional tillage system hedgerows do not constitute an unambiguously dominant production strategy stochastic efficiency with respect to a function is used to identify a range for the coefficient of relative risk aversion within which hedgerows dominate conventional tillage results suggest this range would be rather high hedgerows dominate the conventional cropping strategy only for decision makers with relative risk aversion coefficients in the range 3 5 5 implications for soil conservation adoption in low income settings are discussed

stochastic dominance analysis of soil and water conservation in subsistence crop production in the eastern ethiopian highlands the case of the hunde lafto area the aim of this paper is to analyze whether investment in soil and water conservation results in a higher yield and income and or mitigate variability in yield and income to subsistence farm households in the hunde lafto area net returns from crop production with and without soil and water conservation swc are compared based on stochastic dominance sd criteria a non parametric first order sd and normalized second order are used for data analysis analysis is based on the soil conservation research program scrp database for the hunde lafto research unit the results of the analysis suggest that adopting a conservation strategy results in higher grain yield and net return than in not adopting the normalized second order sd analysis results do not support the hypothesis that conservation strategy is unambiguously better than a noconservation strategy in reducing variability in yield and net return to farmers however conservation strategy has shown second order dominance at lower levels of yield and income that often correspond to unfavorable rainfall conditions this makes it a preferred strategy to cope with the most prevalent risk factor of moisture shortage therefore appropriate policies to help and encourage farmers to adopt swc structures will contribute to improving the welfare of subsistence farm households in the study area and in other similar settings in the country designing and implementing swc techniques that may result in unambiguous second order sd dominance will further improve the desirability and adoption of conservation measures

lag length selection and tests of granger causality between money and income one of the most widely accepred relationships in macroeconomics is the positive relationship between the rate of growth of the money supply and the rate of growth of income a diversity of opinion arises however with the attempt to identify a causal relationship between these variables while friedman and schwartz 1963 initiated the empirical investigation of money income causality sims 1972 made the most significant contribution to this literature with a practical application of the criterion developed by granger 1969 for identifying a causal relationship since the appearance of sims s approach and an alternative one advanced by sargent 1976 many researchers have applied these techniques to the investigation of the causal relationship between money and income l with two exceptions hsiao 1981 and mcmillin and fackler 1984 these researchers have arbitrarily chosen the lengths of their distributed lags the purpose of this paper is to test for granger causality between money and income this paper differs from previous work in that considerably more attention is focused on the effect of the lag specification on the test results in particular we investigate the extent to which rules of thumb arbitrary lag specifications and

money demand the cagan model and the inflation tax some latin american evidence this paper examines the demand for money under conditions of very high inflation in argentina bolivia brazil chi le and peru during the 1970s and 1980s the authors test whether the monetary and inflationary experiences of these countries can be adequately characterized by the cagan 1956 model using an econometric procedure that is not reliant on any particular assumpti on concerning expectations formation except that forecasting errors are stationary the authors also examine the importance of foreign asset substitution in domestic portfolios and the hypothesis that monetary policy was tantamount to maximization of the inflation tax revenue before testing the rational expectations hypothesis copyright 1993 by mit press

a stochastic dominance comparison of reduced tillage systems in corn and soybean production under risk returns per acre of reduced tillage systems including conventional chisel till plant and no till are examined under general assumptions concerning risk these returns are calculated using com and soybean experimental plot yields stochastic dominance rankings indicate an advantage second degree of conventional and chisel over no till when soil loss costs are not assigned annual per acre soil loss costs of 5 15 shift rankings towards the reduced tillage systems a 10 per acre cost results from corn yield losses of 0 06 per year 170 bushel per acre yield base over fifty years with a 5 real discount rate

common stochastic trends in international stock markets abstract this paper presents evidence concerning the number of common stochastic trends in the equity markets of the u s japan england germany and canada monthly and quarterly data from january 1974 through august 1990 on morgan stanley s capital international indices are used to compute johansen 1990 tests for common trends the results indicate the presence of a single common trend driving these countries stock markets estimates of the factor loadings suggest that this trend is most important in the japanese market and least important in the canadian market to interpret this evidence the paper demonstrates that under weak conditions the unit root and cointegration structure of stock prices should mirror the unit root and cointegration structure of their dividend payments the paper tests this prediction by constructing national dividend series from capital international s dividend yield data as well as by using gnp data as with stock prices the evidence points to a single common trend although the stochastic properties and relative importance of this trend differs somewhat from the trend in stock prices

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

the impact of economic and monetary uncertainty on the demand for money in emerging economies by introducing uncertainty monetary volatility and economic volatility are said to make the public cautious hence increase their cash holdings or their demand for money on the other hand because of monetary and economic uncertainty if the public seek safer assets than money they may hold less cash in the absence of any paper testing for the impact of economic and monetary uncertainty on the demand for money in emerging economies this article fills the gap by considering the experiences of six central and eastern european emerging economies and four other emerging economies we found that the impact is transitory in most countries moreover money demand is found correctly specified and stable in most countries suggesting that policy based on monetary targeting could still be effective despite significant output and monetary uncertainty

the classic european hyperinflations revisited testing the cagan model using a cointegrated var approach the cagan model of hyperinflation under rational expectations no bubbles and stationary velocity shocks has the implication that real balances cointegrate with money growth in a re examination of the classic european hyperinflations i find support for this cointegrating property which gives evidence against the assumption made in most previous studies that velocity shocks follow a random walk based on a cointegrated var model i reject statistically for four of the six hyperinflations the exact rational expectations cagan model but at the same time i find evidence of a substantial forward looking element in agents demand for real balances in the sense that a large part of the predictable movement in money growth is incorporated in agents demand for money

reaching out access to and use of banking services across countries the authors 1 present new indicators of banking sector penetration across 99 countries based on a survey of bank regulatory authorities 2 show that these indicators predict household and firm use of banking services 3 explore the association between the outreach indicators and measures of financial institutional and infrastructure development across countries and 4 relate these banking outreach indicators to measures of firms financing constraints in particular they find that greater outreach is correlated with standard measures of financial development as well as with economic activity controlling for these factors the authors find that better communication and transport infrastructure and better governance are also associated with greater outreach government ownership of financial institutions translates into lower access while more concentrated banking systems are associated with greater outreach finally firms in countries with higher branch and atm penetration and higher use of loan services report lower financing obstacles thus linking banking sector outreach to the alleviation of firms financing constraints

the german hyperinflation and the demand for money revisited this paper shows that a remarkably well defined demand for real balances exists for the german hyperinflation episode including the final months which have previously been considered as outliers the authors econometric analysis exploits the theory of cointegration given the obvious nonstationarity of the data further they consider two likely sources of misspecification income variability and the necessity to distinguish between the high inflation and hyperinflation episodes copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

cointegration and cagan s model of hyperinflation under rational expectations when money and prices are integrated of order two philip cagan s 1956 model of hyperinflation will give rise to two different levels of cointegration in most of the literature on the german hyperinflation one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk using data from the german hyperinflation the author finds this assumption to be unjustified based on a straightforward extension of the cointegrated var approach suggested by john y campbell and robert j shiller 1987 a method to evaluate the cagan model under rational expectations and no bubbles is proposed and implemented to the german data copyright 1993 by ohio state university press

how stable is the demand for money in emerging economies one of the key elements of implementing the monetary policy is stability of the demand for money the literature includes a large number of studies that have tested the stability of the money demand in developed as well as less developed countries but not in emerging economies of eastern europe as market based data becomes available from these countries there is an urgency to test old theories for these modern market oriented economies in this article we consider the experiences of armenia bulgaria the czech republic hungary poland russia and the slovak republic using the bounds testing approach to error correction modelling and cointegration we show that money demand is stable in these countries

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

the transactions demand for money in the presence of currency substitution evidence from vietnam currency substitution the use of foreign money to finance transactions between domestic residents is widespread in low income and transition economies traditionally however empirical models of the demand for money tend to concentrate on the portfolio motive for holding foreign currency while maintaining the assumption that the income elasticity of demand for domestic money is invariant to the degree of currency substitution a simple re specification of the demand for money is offered which more accurately reflects the process of currency substitution by allowing for a variable income elasticity of demand for domestic money this specification is estimated for vietnam in the 1990s using a standard cointegration framework evidence is found for currency substitution only in the long run but well defined wealth effects operating in the short run

currency substitution and monetary autonomy the foreign demand for us demand deposits abstract this paper presents new evidence of currency substitution using the two step estimator of cointegrated systems developed by engle and granger 1987 we estimate and find cointegration among variables suggested by the money services model of currency substitution following engle et al 1989 we estimate an error correction model for each of five countries allowing isolation of long term from short term influences on the foreign demand for us demand deposits our results suggest that currency substitution is a potentially significant phenomenon influencing long term monetary policy independence

currency substitution and instability in the world dollar standard comment myron ross correctly points out in his comment that u s price inflation is better predicted by the american money supply mlus than by the broader ten country world money supply mlw over the whole statistical time series from 1960 to 1980 provided in mckinnon s 1982 article specifically he showed that american price inflation is more highly correlated with mlus lagged one or two years than with mlw similarly lagged however mckinnon s present tense assertion that in general growth in the world money supply is a better predictor of american price inflation than is american money growth applies only to the weak dollar standard of the 1970 s and early 1980 s as his preceding discussion intended but failed to indicate clearly only in this later period of volatile exchange rates and price level instability in the united states do alternative hard currencies such as the yen and deutsche mark become competitive as international stores of value and units of account hence international currency substitution associated with the ebb and flow of speculation against or for the dollar significantly destabilized the demand for mlus in the 1970 s and 1980 s and only in this later period might one expect the sum of these internationally substitutable monies ml to predict world and perhaps even american price inflation better than does mlus in contrast during the strong dollar standard of the 1950 s and 1960 s the dollar was unchallenged as international money exchange rates were by and large convincingly fixed speculation for or against the dollar was incapable of substantially altering u s interest rates or of directly affecting the demand for mlus because cyclical international influences did not then destabilize the demand for dollars mlus was by itself a fairly efficient predictor of american prices thus ross s statistical results for the period 1960 to 1980 show somewhat greater predictive strength in mlus compared to ml because the 1960 s data outweigh the dissimilar data of the 1970 s let us instead partition the sample of imf data around the year 1970 whence began the transition from fixed to fluctuating exchange rates and the maturation of alternative monetary systems in europe and japan after applying similar statistical correlation procedures to those used by ross we show a striking structural shift in the world s monetary system the explanatory power of mlw increases sharply as that of mlus declines moderately tan 1982 for the early period of 1960 to 1970 table 1 shows simple correlation coefficients between annual percentage changes in money supplies and changes in american and world wholesale price indices the mlus provides a good explanation of u s prices and of world prices one to two years hence whereas the broader definition of mlw in which mlus enters with a 50 percent weight does surprisingly poorly being insignificantly correlated with american or world prices apparently money growth in industrial countries other than the united states was not then an independent source of worldwide inflationary pressure during the strong dollar standard table 2 shows the same simple correlations between percentage changes in prices and money for the weak dollar standard of stanford university please note that a typographical error giving the last word in the original title as market appeared on the cover of the june 1982 issue of this review the title was correct in the table of contents and on the article

an error correction approach to money demand the case of sudan abstract an empirical analysis of money demand behavior in sudan is presented based on the dynamic error correction model a theoretical basis for the model is offered which allows an explicit parameterized division of effects into long run influences short term adjustments and proportional equilibrium conditions we refute previous claims that income and price effects may be abnormally high in sudan in part by accounting for both foreign exchange and inflationary influences

banking services for everyone barriers to bank access and use around the world using information from 193 banks in 58 countries the authors develop and analyze indicators of physical access affordability and eligibility barriers to deposit loan and payment services they find substantial cross country variation in barriers to banking and show that in many countries these barriers can potentially exclude a significant share of the population from using banking services correlations with bank and country level variables show that bank size and the availability of physical infrastructure are the most robust predictors of barriers further the authors find evidence that in more competitive open and transparent economies and in countries with better contractual and informational frameworks banks impose lower barriers finally though foreign banks seem to charge higher fees than other banks in foreign dominated banking systems fees are lower and it is easier to open bank accounts and to apply for loans on the other hand in systems that are predominantly government owned customers pay lower fees but also face greater restrictions in terms of where to apply for loans and how long it takes to have applications processed these findings have important implications for policy reforms to broaden access

money demand during hyperinflation and stabilization bulgaria 1991 2000 the demand for money in bulgaria is estimated over a ten year period 1991 2000 of high inflation and inflation uncertainty the paper distinguishes between three well defined sub periods high variable but not systematically accelerating inflation from 1991 until april 1996 the near hyperinflation period from may 1996 to february 1997 and the subsequent stabilization after the adoption of a currency board the empirical analysis utilizes a standard methodology of cointegration and error correction the functional determinants of the demand for money change during the different sub periods during the hyperinflation episode cagan s model is employed

modelling money demand for a panel of eight transitional economies in this article we estimate money demand functions for a panel of eight transitional economies using quarterly data for the period 1995 01 1995 to 2005 03 we find that real m1 and real m2 and their determinants namely real income and short term domestic interest rate are cointegrated both for individual countries as well as for the panel long run elasticities suggest that consistent with theory real income positively and nominal interest rate negatively impact real money demand our test for panel granger causality suggests short run bidirectional causality between m1 and m2 and their determinants finally our tests for stability of the money demand functions reveal more cases of unstable money demand functions when m2 is used as a proxy for money demand

another visit to the cagan model of money demand the latest russian experience abstract this paper investigates empirically the cagan style money demand function for russia during the recent hyperinflation era 1992 1994 using the johansen multivariate cointegration test results indicate that rate of change of exchange rate currency depreciation is required in the demand function for real m2 and real currency in order to obtain a stationary long run relationship error correction model results show that there exists a bidirectional causality between real money balances and determinants of real money demand including currency depreciation exchange rate sensitivity of the demand for money indicates currency substitution

a theory of trickle down growth and development this paper develops a model of growth and income inequalities in the presence of imperfect capital markets and it analyses the trickle down effect of capital accumulation moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities three main conclusions are obtained from this model first when the rate of capital accumulation is sufficiently high the economy converges to a unique invariant wealth distribution second even though the trickle down mechanism can lead to a unique steady state distribution under laissez faire there is room for government intervention in particular redistribution of wealth from rich lenders to poor and middle class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle down process third the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them in other words this model can generate a kuznets curve

bank supervision and corruption in lending abstract which commercial bank supervisory policies ease or intensify the degree to which bank corruption is an obstacle to firms raising external finance based on new data from more than 2500 firms across 37 countries this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms financing obstacles we find that the traditional approach to bank supervision which involves empowering official supervisory agencies to monitor discipline and influence banks directly does not improve the integrity of bank lending rather we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance in extensions we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions

credit access human capital and class structure mobility this article examines the impact of microenterprise credit programmes on class structure mobility in developing countries it develops a model that endogenously generates an eight fold class structure class membership is determined by optimal choice of labour activity which is a function of access to credit and human capital endowments predictions from the model suggest that better access to credit will foster upward class mobility among self employed entrepreneurs and that this upward class mobility will be accentuated among entrepreneurs with high levels of human capital theoretical predictions from the model are compared with data on class structure mobility collected first hand in western guatemala empirical results show that upward class structure mobility increases substantially with access to credit and also suggest that the combined effect of innate entrepreneurial ability and credit access has a greater impact on upward class structure mobility than the interaction between formal schooling

culture openness and finance abstract differences in culture proxied by differences in religion and language cannot be ignored when examining why investor protection differs across countries we show that a country s principal religion predicts the cross sectional variation in creditor rights better than a country s natural openness to international trade its language its income per capita or the origin of its legal system catholic countries protect the rights of creditors less well than protestant countries a country s natural openness to international trade mitigates the influence of religion on creditor rights culture proxies are also helpful in understanding how investor rights are enforced across countries

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

the monetary dynamics of sustained high inflation taiwan 1945 1949 taiwan experienced a sustained period of very high price inflation in the period 1945 1949 which led to an eventual rise in prices even greater than that experienced during some of the classic european hyperinflations analyzed by cagan 3 and others makinen and woodward 22 90 note that on the list of recognized hyperinflations one will not find taiwan but nevertheless argue that this episode should be classed as such although the average rate of taiwanese inflation during this period was not as high as in the episodes examined by cagan the very length of the period during which inflation remained high singles the taiwanese experience out as an extremely interesting period for analysis by monetary economists in this paper a primary aim is to examine whether the salient features of the demand for money during this period can be adequately characterized by an application of cagan s model of money demand under conditions of hyperinflation in particular we apply a test of cagan s model which is not contingent on any particular assumption concerning expectations formation except that agents errors in forecasting inflation are stationary using these first stage estimates we then examine subject only to the same weak assumption of stationary forecasting errors the hypothesis that the monetary authorities expanded the money supply in such a way as to maximize the inflation tax revenue ensuing from money creation finally we test the rational expectations version of the hyperinflation model of money demand the remainder of the paper is set out as follows in section ii we discuss the background to the taiwanese hyperinflation of 1945 1949