The Classic European Hyperinflations Revisited: Testing the Cagan Model Using a Cointegrated VAR Approach
AbstractThe Cagan model of hyperinflation under rational expectations, no bubbles and stationary velocity shocks has the implication that real balances cointegrate with money growth. In a reexamination of the classic European hyperinflations, I find support for this cointegrating property, which gives evidence against the assumption made in most previous studies that velocity shocks follow a random walk. Based on a cointegrated VAR model, I reject statistically, for four of the six hyperinflations, the exact rational expectations Cagan model; but at the same time I find evidence of a substantial forward-looking element in agents' demand for real balances, in the sense that a large part of the predictable movement in money growth is incorporated in agents' demand for money. Copyright 1994 by The London School of Economics and Political Science.
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Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 61 (1994)
Issue (Month): 243 (August)
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