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Further Evidence On Expectations And The Demand for Money During the German Hyperinflation

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  • Jacob A. Frenkel

Abstract

Probably no event in monetary history has been more studied than the German hyperinflation of the early 1920's. Economists have been attracted to study this episode since it provides an environment that is close to a controlled experiment which is so rare in the study of social sciences. This paper provides further evidence on the role of expectations in effecting the demand for money during the German hyperinflation. One of the difficulties in studying empirically the role of expectations is the lack of an observable variable measuring expectations. This paper examines three measures of expectations that are derived from observed data from the market for foreign exchange. The first measure is based on the hypothesis that the forward exchange rate measures the expected future spot exchange rate and thereby provides an observable measure of the market's expectations concerning the depreciation of the currency. The other two measures distinguish between the forward exchange rate and the expected exchange rate and are based on the supplementary hypothesis that rational behavior requires expectations to be unbiased. Accordingly, the measures of expectations are constructed by using the forward exchange rate along with the information on the systematic relationship between forward and spot exchange rates. The various measures are then used in estimating the demand for money. The emphasis on measures of expectations that are based on data from the foreign exchange markets reflects the belief that in an inflationary economy with flexible exchange rates one of the relevant substitutes for holding domestic money is foreign exchange.

Suggested Citation

  • Jacob A. Frenkel, 1978. "Further Evidence On Expectations And The Demand for Money During the German Hyperinflation," NBER Working Papers 0289, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0289
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    References listed on IDEAS

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    1. Fama, Eugene F & Farber, Andre, 1979. "Money, Bonds, and Foreign Exchange," American Economic Review, American Economic Association, vol. 69(4), pages 639-649, September.
    2. repec:bla:scandj:v:78:y:1976:i:2:p:200-224 is not listed on IDEAS
    3. Schmidt, Peter & Sickles, Robin, 1977. "Some Further Evidence on the Use of the Chow Test under Heteroskedasticity," Econometrica, Econometric Society, vol. 45(5), pages 1293-1298, July.
    4. Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-516, May.
    5. Salemi, Michael K & Sargent, Thomas J, 1979. "The Demand for Money during Hyperinflation under Rational Expectations: II," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(3), pages 741-758, October.
    6. Toyoda, Toshihisa, 1974. "Use of the Chow Test under Heteroscedasticity," Econometrica, Econometric Society, vol. 42(3), pages 601-608, May.
    7. 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.
    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. Taylor, John B, 1975. "Monetary Policy during a Transition to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1009-1021, October.
    10. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
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    Cited by:

    1. Daniel Garces-Diaz, 2004. "How Does the Monetary Model of Exchange Rate Determination Look When It Really Works?," Econometric Society 2004 North American Winter Meetings 60, Econometric Society.

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