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Misspecification versus bubbles in hyperinflation data: Comment

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  • Engsted, Tom

    ()
    (Department of Finance, Aarhus School of Business)

Abstract

In this comment I critically review some of the claims and analyses made by Hooker (2000) in his study of the Cagan hyperinflation model. I argue that: i) contrary to what Hooker claims, cointegration tests can be used to discriminate between bubbles and no bubbles; ii) contrary to Hooker's claim, his empirical results for the interwar European hyperinflations do not general imply that the Cagan model is misspecified; iii) although Hooker's analyses build directly on the Durlauf and Hall (1989) methodology, he neglects an important part of that methodology, namely the measurement of the magnitude of noise. I present such measures, and together with reported cointegration tests the noise measure help reinterpreting Hooker's empirical results.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-2.

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Length: 14 pages
Date of creation: 21 Feb 2002
Date of revision:
Handle: RePEc:hhb:aarfin:2002_002

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
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Keywords: Cagan model; Cointegration; Measurement of noise;

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  1. John Y. Campbell & Robert J. Shiller, 1988. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  2. Hooker, Mark A., 2000. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 583-600, August.
  3. Steven N. Durlauf & Robert E. Hall, 1989. "Bounds on the Variances of Specification Errors in Models with Expectations," NBER Working Papers 2936, National Bureau of Economic Research, Inc.
  4. Steven N. Durlauf & Louis J. Maccini, 1993. "Measuring Noise in Inventory Models," NBER Working Papers 4487, National Bureau of Economic Research, Inc.
  5. Engsted, Tom, 1994. "The Classic European Hyperinflations Revisited: Testing the Cagan Model Using a Cointegrated VAR Approach," Economica, London School of Economics and Political Science, vol. 61(243), pages 331-43, August.
  6. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-55, July.
  7. Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
  8. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  9. Kenneth D. West, 1988. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
  10. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  11. Petrovic, Pavle & Mladenovic, Zorica, 2000. "Money Demand and Exchange Rate Determination under Hyperinflation: Conceptual Issues and Evidence from Yugoslavia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 785-806, November.
  12. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
  13. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 369-84, July.
  14. 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.
  15. 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.
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