Functional form of the demand for real balances in Cagan's hyperinflation model

Abstract

This paper uses recent advances in the development of testable implications of the Cagan model of hyperinflation. It extends the range of candidate functional forms of the demand for real balances in hyperinflations to include nonstandard versions in which the absolute inflation elasticity is a decreasing function of inflation. These nonstandard functional forms are of interest because they are known to have desirable theoretical properties. This paper finds empirical justification for a nonstandard form that performs at least as well as the traditional semilogarithmic functional form.