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Expectations in an open economy hyperinflation: Evidence from Germany 1921–23

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  • Reghezza, Alessio
  • Seghezza, Elena
  • Thornton, John

Abstract

We reconsider the Beladi et al. (1993) technique to measure expectations in hyperinflation episodes by allowing money to be substitutable with foreign assets as well as goods. We determine new correctness conditions for adaptive and rational expectations formation in this context and show that, taking into account these conditions, the data for the German hyperinflation of the 1920s is consistent with rational expectation formation.

Suggested Citation

  • Reghezza, Alessio & Seghezza, Elena & Thornton, John, 2020. "Expectations in an open economy hyperinflation: Evidence from Germany 1921–23," Economics Letters, Elsevier, vol. 192(C).
    • Handle: RePEc:eee:ecolet:v:192:y:2020:i:c:s0165176520301336
    DOI: 10.1016/j.econlet.2020.109176
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    References listed on IDEAS

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    1. Taylor, Mark P, 1991. "The Hyperinflation Model of Money Demand Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 327-351, August.
    2. Binder, Carola Conces, 2016. "Estimation of historical inflation expectations," Explorations in Economic History, Elsevier, vol. 61(C), pages 1-31.
    3. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-350, June.
    4. Beladi, Hamid & Choudhary, Munir A S & Parai, Amar K, 1993. "Rational and Adaptive Expectations in the Present Value Model of Hyperinflation," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 511-514, August.
    5. Webb, Steven B., 1986. "Fiscal News and Inflationary Expectations in Germany after World War I," The Journal of Economic History, Cambridge University Press, vol. 46(3), pages 769-794, September.
    6. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-670, September.
    7. Chow, Gregory C, 1989. "Rational versus Adaptive Expectations in Present Value Models," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 376-384, August.
    8. Abel, Andrew & Dornbusch, Rudiger & Huizinga, John & Marcus, Alan, 1979. "Money demand during hyperinflation," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 97-104, January.
    9. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
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    Cited by:

    1. Olli-Pekka Hilmola, 2021. "Inflation and Hyperinflation Countries in 2018–2020: Risks of Different Assets and Foreign Trade," JRFM, MDPI, vol. 14(12), pages 1-16, December.

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    More about this item

    Keywords

    Rational expectations; Adaptive expectations; Hyperinflation; Germany;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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