How High Can Inflation Get during Hyperinflation? A Transaction Costs Demand for Money Approach

Jesús Vázquez, Universidad del País Vasco

Abstract

We develop an inflationary finance model where transaction costs of the type suggested by Barro (1976) are assumed. The model implies that there is a single unstable steady state. This result is in sharp contrast to those of traditional inflationary finance literature in which there exists the possibility of dual steady states and a high-inflation trap. In our model, inflation increases at an increasing rate along the hyperinflationary path, as it does during hyperinflationary episodes, until it reaches an upper bound. Moreover, we show that the inflation rate reaches a higher upper bound when the country is more financially developed and private resources are larger.