Money demand and inflation in Yugoslavia, 1980-1989 - Comment

A modified Cagan model, stating that real money and inflation are cointegrated, has been previously estimated for a number of high inflation episodes but, however, the wide dispersion of money demand semielasticity was obtained. This comment questions the ability of the model to explain such diverse inflation episodes by showing that it does not hold in the extreme case of Yugoslavia, that is one of the lowest inflation and the highest semielasticity obtained. Thus, an alternative econometric evidence is supplied, indicating that cointegration is not present The former is strongly backed by the economic evidence advanced that inflation might have a structural break. Upon testing, stationarity with a structural break is obtained, hence explaining the absence of the cointegration.