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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Misspecification versus Bubbles in Hyperinflation Data: Monte Carlo and Interwar European Evidence
Mark A. Hooker

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.

Keywords: Hyperinflation, bubble, specification error

Full paper (1645 KB PDF)

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Last update: January 28, 1998