| Sumario: | When consumers are uncertain about future prices, it makes a difference whether anticipations with respect to the mathematical expectations of the real rate of return on money or anticipations with respect to the expected rate of inflation are used to explain changes in the demand for money. The difference arises from the fact that the rate of inflation is not a linear function of the real rate of return. In this note, we provide evidence that supports the specification of the demand for money as a function of anticipations with respect to the expected real rate of return on money, over the usual specification which uses the expected rate of inflation. Empirically, the distinction between the real rate of return and the rate of inflation is important only when there are changes in the anticipated variance of the rate of inflation. It is shown in Eden (1975) that during the post-World War I periods of hyperinflations, changes in the variance of the rate of inflation were substantial and therefore the performance of the real rate of return in explaining changes in the demand for money was significantly better than the performance of the rate of inflation (in Cagan's [1956] original study).
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