Money demand and the relative price of capital goods in hyperinflations

We investigate dynamic interactions between relative price movements and money demand behaviors during hyperinflations, viewing relative price changes as resulting primarily from real disturbances. We develop a general equilibrium model with heterogeneous consumption and capital goods to illustrate how monetary shocks may produce real effects through the relative price channel. This motivates the design of long-run restrictions to identify a structural vector autoregression, employing data from the post-WWI Germany and the post-WWII Chinese hyperinflationary episodes. The empirical results support the contention that both real and nominal shocks have important effects on the relative price and money demand during hyperinflations.