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Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence

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  • Mark A. Hooker
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    Abstract

    This paper analyzes tests of the Cagan hyperinflation-money demand model that have several advantages relative to those in the literature. They do not confound specification error with rational bubbles, are implementable with a linear procedure, and are frequently able to detect periodically collapsing bubbles that have challenged existing tests. After a Monte Carlo analysis, the tests are applied to data from hyperinflations in Austria, Germany, Hungary, and Poland. Strong evidence of model misspecification is found for Austria, while the model with a rational, explosive component well characterizes the Polish data. Inferences for Germany and Hungary are mixed.

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    File URL: http://www.federalreserve.gov/pubs/feds/1997/199749/199749abs.html
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1997-49.

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    Date of creation: 1997
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    Handle: RePEc:fip:fedgfe:1997-49

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    Related research

    Keywords: Econometrics ; Econometric models;

    References

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    3. Blackburn, Keith & Sola, Martin, 1996. "Market Fundamentals versus Speculative Bubbles: A New Test Applied to the German Hyperinflation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(4), pages 303-17, October.
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    13. Phylaktis, Kate & Taylor, Mark P, 1993. "Money Demand, the Cagan Model and the Inflation Tax: Some Latin American Evidence," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 32-37, February.
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