| k = 1/v | 0.667 |
| Real money demand M^d/P | 100.0 |
Demand depends ONLY on Y. Interest rate doesn't matter in this version.
| 1/(1+i) | 0.952 |
| Real money demand M^d/P | 142.9 |
Higher i → less cash held. Money demand falls when interest rates rise.
| Episode | ΔM% (M2) | ΔY% | QTM-predicted π | Actual π |
|---|---|---|---|---|
| U.S. 1960s | 7% | 4% | 3% | 2.5% |
| U.S. 1970s | 10% | 3% | 7% | 7.4% |
| U.S. 2010s (post-QE) | 6% | 2% | 4% | 1.8% (V fell) |
| U.S. 2020–22 | 25% | 1% | 24% | 4.7% avg (V fell sharply) |
| Argentina 2023 | 120% | 0% | 120% | 211% (V expansion) |
| Zimbabwe 2008 | 10^12 % | negative | 10^12 % | 10^11 % (V exploded) |
QTM is a LONG-RUN benchmark. In hyperinflations, velocity rises sharply (people don't want to hold cash), making actual π HIGHER than ΔM% alone would predict. At low inflation, V can fall (post-QE), making π LOWER than ΔM% predicts.
Both use constant-velocity demand. In the anticipated case, students who go through the Cagan model with interest-elastic demand would see P_1 already rise; here we use the simple version where P depends only on current M.
| Period | M_t | P_t | π_t (actual) | E_{t-1} π_t (expected) | M/P |
|---|
Every hyperinflation has two ingredients in its END: (1) Credible fiscal reform — the government commits to a balanced budget so it no longer needs to print money to fund spending. (2) Central bank independence — the institutional barrier that prevents future political pressure to inflate. Pure monetary tightening without fiscal reform fails because markets correctly anticipate that the government will return to printing as soon as the deficit becomes unbearable. This is why Argentina's repeated stabilization attempts (1985, 1991, 2001, 2024) succeed or fail based on FISCAL credibility, not Central Bank rhetoric.