Modelling the Transaction Role of Money and the Essentiality of Money in an Explosive Hyperinflation Context

Abstract

This paper shows firstly that the cash-in-advance model presents exactly the same kind of limitations as the money-in-the-utility-function model for characterizing explosive hyperinflation. These limitations relate to sufficient money essentiality in the sense of SCHEINKMAN [1980]. Thereby this paper departs from GUTIERREZ AND VAZQUEZ [2004] and contributes to the understanding of failure of the Cagan inflationary finance models with perfect foresight. Secondly, it shows that the inclusion of the goods market equilibrium condition calls into question the validity of explosive hyperinflationary paths as equilibrium paths in the cash-in-advance model. Two solutions are proposed to save the validity of explosive hyperinflation paths.