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, Chile and Peru during the 1970s and 1980s. It tests whether the monetary and inflationary experiences of these countries can be adequately characterized by the Cagan (1956) model, using an econometric procedure which is not reliant on any particular assumption concerning expectations formation except that forecasting errors are stationary. It also examines 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. -Authors