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On the Explosive Nature of Hyper-Inflation Data

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  • Nielsen, Bent

Abstract

Empirical analyses of Cagan's money demand schedule for hyper-inflation have largely ignored the explosive nature of hyper-inflationary data. It is argued that this contributes to an (i) inability to model the data to the end of the hyper-inflation, and to (ii) discrepancies between 'estimated' and 'actual' inflation tax. Using data from the extreme Yugoslavian hyper-inflation it is shown that a linear analysis of levels of prices and money fails in addressing these issues even when the explosiveness is taken into account. The explanation is that log real money has random walk behaviour while the growth of log prices is explosive. A simple solution to these issues is found by replacing the conventional measure of inflation by the cost of holding money. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2008-21
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 21 ()
Pages: 1-29

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Handle: RePEc:zbw:ifweej:7334

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Keywords: Cost of holding money; co-explosiveness; co-integration; explosive processes; hyperinflation;

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References

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  1. Nielsen, Bent, 2001. "The Asymptotic Distribution of Unit Root Tests of Unstable Autoregressive Processes," Econometrica, Econometric Society, vol. 69(1), pages 211-19, January.
  2. Nielsen, Bent, 2005. "Strong Consistency Results For Least Squares Estimators In General Vector Autoregressions With Deterministic Terms," Econometric Theory, Cambridge University Press, vol. 21(03), pages 534-561, June.
  3. Bent Nielsen, 2005. "Analysis of co-explosive processes," Economics Papers 2005-W08, Economics Group, Nuffield College, University of Oxford.
  4. Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, vol. 90(2), pages 265-289, June.
  5. Engsted, Tom, 2006. "Explosive bubbles in the cointegrated VAR model," Finance Research Letters, Elsevier, vol. 3(2), pages 154-162, June.
  6. Eric Engler & Bent Nielsen, 2007. "The empirical process of autoregressive residuals," Economics Series Working Papers 2007-W01, University of Oxford, Department of Economics.
  7. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  8. Diba, Behzad T. & Grossman, Herschel I., 1988. "Rational inflationary bubbles," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 35-46, January.
  9. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-50, June.
  10. Sargent, Thomas J, 1977. "The Demand for Money During Hyperinflations under Rational Expectations: I," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 59-82, February.
  11. Christiano, Lawrence J, 1987. "Cagan's Model of Hyperinflation under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 33-49, February.
  12. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
  13. Evans, Paul, 1978. "Time-Series Analysis of the German Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(1), pages 195-209, February.
  14. Petrovic, Pavle & Bogetic, Zeljko & Vujosevic, Zorica, 1999. "The Yugoslav Hyperinflation of 1992-1994: Causes, Dynamics, and Money Supply Process," Journal of Comparative Economics, Elsevier, vol. 27(2), pages 335-353, June.
  15. Engsted, Tom, 1993. "Cointegration and Cagan's Model of Hyperinflation under Rational Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 350-60, August.
  16. Michael, P & Nobay, A R & Peel, D A, 1994. "The German Hyperinflation and the Demand for Money Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 1-22, February.
  17. Abel, Andrew & Dornbusch, Rudiger & Huizinga, John & Marcus, Alan, 1979. "Money demand during hyperinflation," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 97-104, January.
  18. Engsted, Tom, 1996. "The monetary model of the exchange rate under hyperinflation: New encouraging evidence," Economics Letters, Elsevier, vol. 51(1), pages 37-44, April.
  19. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-70, September.
  20. Engsted, Tom, 1998. "Money Demand During Hyperinflation: Cointegration, Rational Expectations, and the Importance of Money Demand Shocks," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 533-552, July.
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Cited by:
  1. Jusélius, Katarina, 2009. "Special Issue on Using Econometrics for Assessing Economic Models: An Introduction," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(28), pages 1-20.
  2. Katarina Juselius, 2009. "Time to reject the privileging of economic theory over empirical evidence? A Reply to Lawson (2009)," Discussion Papers 09-16, University of Copenhagen. Department of Economics.
  3. Ahumada, Hildegart A. & Garegnani, Maria Lorena, 2012. "Forecasting a monetary aggregate under instability: Argentina after 2001," International Journal of Forecasting, Elsevier, vol. 28(2), pages 412-427.

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