Testing Hyperinflation Theories Using the Inflation Tax Curve: A Case Study

This paper tests hyperinflation theories using the inflation tax curve. This curve is estimated directly instead of the usual approach which is a by-product of demand for money empirical estimates. The inflation tax functional form encompasses several specifications as particular cases and allows to test whether or not money is inelastic. This strategy is applied to the Brazilian annual data covering almost half a century. The money inelasticity hypothesis is rejected. Thus, both the bubble and the strict hyperinflation hypotheses are rejected. The weak hyperinflation hypothesis is not rejected and the Brazilian economy could have been in the 'wrong' side of the Laffer curve for some time during hyperinflation. This outcome, contrary to conventional wisdom, is predicted by the weak hypothesis.