Cagan's Model of Hyperinflation under Rational Expectations
AbstractThis paper studies P. Cagan's model of the German hyperinflation under the hypothesis that adaptive expectations are rational. It shows that inference about the key money demand elasticity parameter, a, is very senstitive to the specification of the dynamic interaction of the unobserved money demand shock with prices and money. In particular, if T. J. Sargent's 1977 specification is modified, then his basic conclusions are overturned: identification of a does not require prior knowledge about the covariance of unobserved shock terms; and d ata on the German hyperinflation imply a sharp, not loose estimate of a, which is of plausible magnitude. Finally, informal tests indicate that modifying Sargent's specification gives rise to improved model fit. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Bibliographic InfoArticle provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.
Volume (Year): 28 (1987)
Issue (Month): 1 (February)
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- Engsted, Tom, 1998. "Money Demand During Hyperinflation: Cointegration, Rational Expectations, and the Importance of Money Demand Shocks," Journal of Macroeconomics, Elsevier, Elsevier, vol. 20(3), pages 533-552, July.
- Alexei Deviatov & Neil Wallace, 2006. "Estimating a Cagan-type demand function for gold: 1561-1913," Working Papers w0080, Center for Economic and Financial Research (CEFIR).
- Topal, yavuz Han, 2013. "On the tracks of Zimbabwe’s Hyperinflation: A Quantitative Investigation," MPRA Paper 56117, University Library of Munich, Germany.
- Nielsen, Bent, 2008.
"On the Explosive Nature of Hyper-Inflation Data,"
Economics - The Open-Access, Open-Assessment E-Journal,
Kiel Institute for the World Economy, vol. 2(21), pages 1-29.
- Hooker, Mark A., 2000. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(4), pages 583-600, August.
- Mark A. Hooker, 1997. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-49, Board of Governors of the Federal Reserve System (U.S.).
- Imrohoroglu, Selahattin, 1995. "A Markov switching model for the Hungarian price stabilization plan of 1924," Journal of Macroeconomics, Elsevier, Elsevier, vol. 17(2), pages 347-355.
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