Testing for rational bubbles with exogenous or endogenous fundamentals: The German hyperinflation once more

https://doi.org/10.1016/0304-3932(89)90019-6Get rights and content

Abstract

The presence of rational price bubbles during the German hyperinflation is tested under two different structural assumptions on the money process. If the money supply is constrained to be exogenous to the current inflation rate, the hypothesis of no bubble can be rejected. However, this is no longer found to be true when a feedback rule from inflation to money creation is allowed. The analysis contradicts previous results presented in the literature.

References (31)

  • P. Evans

    Time series and structural analysis of the German hyperinflation

    International Economic Review

    (1978)
  • (1985)
  • R. Flood et al.

    Market fundamentals versus price level bubbles: The first tests

    Journal of Political Economy

    (1980)
  • R. Flood et al.

    An economic theory of monetary reform

    Journal of Political Economy

    (1980)
  • R. Flood et al.

    An evaluation of recent evidence on stock market bubbles

    (1986)
  • Cited by (27)

    • Economic policy uncertainty exposure and stock price bubbles: Evidence from China

      2021, International Review of Financial Analysis
      Citation Excerpt :

      Therefore, to reduce the huge fluctuation of the market and protect the interests of investors, it is of crucial to examine the factors affecting stock price bubbles (Bernanke, 2002). Literature examines possible determinants that affect bubbles from the micro aspects such as information asymmetry (Allen & Gorton, 1993), noisy trading (DeLong, Shleifer, Summers, & Waldmann, 1990; Tan, Jin, & Wu, 2015), heterogeneous beliefs (Niu, Wu, Ling, & Zhou, 2018), overconfidence (Michailova & Schmidt, 2016; Scheinkman & Xiong, 2003), and the macro aspects such as inflation (Casella, 1989) and bank credit (Allen & Gale, 2000).1 Different from previous studies, this paper examines the impact of firms' heterogeneous economic policy uncertainty exposure on the stock price bubbles.

    • Misspecification versus bubbles in hyperinflation data: Comment

      2003, Journal of International Money and Finance
    • Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence

      2000, Journal of International Money and Finance
      Citation Excerpt :

      By contrast, the discount factor for monthly data is near unity in most finance and macroeconomics applications. The tests outlined above were designed to combine the insights of Hall (1978), that models with expectations yield orthogonality conditions which can be used as specification tests, and of West (1987) and Casella (1989), that a comparison of the general and fundamental solutions could yield a test for bubbles. Durlauf and Hall (1989) demonstrated how to extract estimates of model noise in the exact case, and showed that the variance of the noise series defines a lower bound that may be used in “variance bounds” tests.

    • Government expenditure and the dynamics of high inflation

      1999, Journal of Development Economics
    • Ruling out speculative hyperinflations: The role of the government

      1996, Journal of Economic Dynamics and Control
    View all citing articles on Scopus

    I thank Oliver Blanchard, Rudi Dornbusch, Jim Powell, Mike Whinston, Jeff Wooldridge, an anonymous referee, the editors of this journal, and especially Jonathan Feinstein and Danny Quah for many helpful comments. Financial support from the Social Sciences Research Council is gratefully acknowledged.

    View full text