Cointegration and Cagan's Model of Hyperinflation under Rational Expectations
AbstractWhen money and prices are integrated of order two, Philip Cagan's (1956) model of hyperinflation will give rise to two different levels of cointegration. In most of the literature on the German hyperinflation, one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk. Using data from the German hyperinflation, the author finds this assumption to be unjustified. Based on a straightforward extension of the cointegrated VAR-approach suggested by John Y. Campbell and Robert J. Shiller (1987), a method to evaluate the Cagan model under rational expectations and no bubbles is proposed and implemented to the German data. Copyright 1993 by Ohio State University Press.
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Volume (Year): 25 (1993)
Issue (Month): 3 (August)
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