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A Multivariate I(2) Cointegration Analysis Of German Hyperinflation

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  • Dimitris Georgoutsos
  • George Kouretas

    (Department of Economics, University of Crete, Greece)

Abstract

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.

Suggested Citation

  • Dimitris Georgoutsos & George Kouretas, 2000. "A Multivariate I(2) Cointegration Analysis Of German Hyperinflation," Working Papers 0001, University of Crete, Department of Economics, revised 00 Jul 2001.
    • Handle: RePEc:crt:wpaper:0001
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    3. Yuanyuan Li & Dietmar Bauer, 2020. "Modeling I(2) Processes Using Vector Autoregressions Where the Lag Length Increases with the Sample Size," Econometrics, MDPI, vol. 8(3), pages 1-28, September.
    4. Alexandre Sokic, 2012. "The Monetary Analysis of Hyperinflation and the Appropriate Specification of the Demand for Money," German Economic Review, Verein für Socialpolitik, vol. 13(2), pages 142-160, May.
    5. Alexandre Sokic, 2008. "Monetary Hyperinflations, Speculative Hyperinflations and Modeling the Use of Money," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 51-70, August.
    6. Jian Yang, 2006. "Information transmission between Eurocurrency and domestic interest rates: evidence from the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 16(9), pages 675-685.

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    More about this item

    Keywords

    I(2) analysis; hyperinflation; cointegration; identification; temporal stability;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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