Interest rate, money demand and seigniorage: The Chinese hyperinflation 1946-1949

- We propose a direct measure of inflationary expectations-the black-market interest rate in Shanghai-and study the behavior of money demand in the Chinese hyperinflation.
- We provide some evidences to endorse the adequacy of using the black-market interest rate.
- Although the log-log schedule may provide an accurate description of money demand with relatively low interest rate, the pattern of seigniorage collected in the highest hyperinflation is consistent with the prediction of the semi-log schedule.
- The comparison of the seigniorage actually collected with the maximum steady state level shows that the economy might be on the increasing side of the Laffer curve except for the concluding stage of the hyperinflation.

The lack of an observable variable measuring inflationary expectation has been a major difficulty in empirical work on hyperinflation. In this paper we propose a direct measure of expectations-the black-market interest rate in Shanghai-and study the behavior of money demand in the Chinese hyperinflation. Although the log-log schedule may provide an accurate description of money demand with relatively low interest rate, the pattern of seigniorage collected in the highest hyperinflation is consistent with the prediction of the semi-log schedule. The comparison of the seigniorage actually collected with the maximum steady state level shows that the economy might be on the increasing side of the Laffer curve except for the concluding stage of the hyperinflation. This suggests that the Chinese hyperinflation has been driven mainly by the government's quest for revenue.