Using the model proposed by Cagan (1956), the money demand and prices are investigated in Brazilian high-inflation period between 1970 and 1994. Once the relevant series potentially have structural breaks, cointegration methods which permit changes in the cointegration vector are used. The long-run relationship between the relevant series is also used to test the presence of rational bubbles, the hypothesis of maximization of the revenues with inflation tax and the validity of rational expectation hypothesis. Finally, in an unusual approach in this literature, noise measures are calculated with respect to money demand. In Brazilian case a large portion of the variation in money demand are explained by such shocks.
Cagan model; rational expectations; hyperinflation; cointegration; money demand
