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A Multivariate I(2) Cointegration Analysis Of German Hyperinflation

  • Dimitris Georgoutsos
  • George Kouretas

    ()

    (Department of Economics, University of Crete, Greece)

This paper re-examines the Cagan model of German hyperinflation during the 1920s under the twin hypotheses that the system contains variables that are I(2) and that a linear trend is required in the cointegrating relations. Using the recently developed I(2) cointegration analysis developed by Johansen (1992, 1995, 1997) extended by Paruolo (1996) and Rahbek et al. (1999) we find that the linear trend hypothesis is rejected for the sample. However, we provide conclusive evidence that money supply and the price level have a common I(2) component. Then, the validity of Cagan’s model is tested via a transformation of the I(2) to an I(1) model between real money balances and money growth or inflation. This transformation is not imposed on the data but it is shown to satisfy the statistical property of polynomial cointegration. Evidence is obtained in favor of cointegration between the two sets of variables which is however weakened by the sample dependence of the trace test that the application of the recursive stability tests for cointegrated VAR models show.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0001.

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Length: 32 pages
Date of creation: 00 2000
Date of revision: 00 Jul 2001
Handle: RePEc:crt:wpaper:0001
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  1. Sephton, Peter S. & Larsen, Hans K., 1991. "Tests of exchange market efficiency: fragile evidence from cointegration tests," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 561-570, December.
  2. 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.
  3. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  4. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
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  7. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
  8. Choudhry, T., 1998. "Another visit to the Cagan model of money demand: the latest Russian experience," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 355-376, April.
  9. 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.
  10. Goodfriend, Marvin S., 1982. "An alternate method of estimating the Cagan money demand function in hyperinflation under rational expectations," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 43-57.
  11. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  12. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  13. 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.
  14. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  15. Paruolo, Paolo, 2000. "Asymptotic Efficiency Of The Two Stage Estimator In I (2) Systems," Econometric Theory, Cambridge University Press, vol. 16(04), pages 524-550, August.
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  17. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
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  25. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
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  37. 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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