Cagan hypothesis

The Cagan hypothesis, proposed by economist Phillip Cagan in 1956, suggests that people's demand for money decreases when the expected inflation rate rises. In simple terms, if individuals anticipate that prices will increase rapidly, they are less likely to hold on to cash since its purchasing power will diminish. Instead, they may spend or invest their money quickly to avoid losing value. This behavior can lead to higher inflation, as more money is spent in the economy when people are trying to avoid holding onto cash that will soon be worth less.