The monetary dynamics of hyperinflation: Taiwan 1945-1949

Abstract

In this paper we consider the supply of, and more particularly the demand for money during the Taiwanese hyperinflation of 1945-1949. In particular, we test Cagan's (1956) hyperinflation model of money demand by a procedure which is not contingent on any particular assumption concerning expectations formation other than that agents' errors in forecasting inflation are stationary. We also test, subject only to the same weak assumption, the hypothesis that the monetary authorities expanded the money supply in such a say as to maximise the inflation tax revenue ensuing from money creation. These first stage results are then used to test the rational expectations hypothesis.