the hyperinflation model of money demand revisited in this paper we propose a test of the hyperinflation model of money demand which is valid under any assumption concerning agents expectations subject only to the restriction that forecasting errors are stationary it is also demonstrated that highly efficient parameter estimates can be obtained and restrictions on them tested under the same weak assumption finally it is shown how these first stage estimates can be utilized to test the stronger assumption of rational expectations the arguments are illustrated by analysis of the classic data on european hyperinflations previously analyzed by cagan 1956 barro 1970 and abel dornbusch huizinga and marcus 1979 copyright 1991 by ohio state university press

strategic pricing with customer rationing the case of primary metals firms in primary metal industries often charge subcompetitive prices and in periods of high demand they may ration their customers a model is developed to ex plain these empirical regularities in the model firms with market power are aware that the price they charge today affects their demand tomorrow in addition the strategic interaction among firms reinforces this intertemporal effect in the equilibrium of the two stage game oligopolists can price below marginal cost and when capacity constraints are introduced the equilibrium can involve rationing model predictions are assessed using market structure and technology data for several primary metal industries

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

comments rational bubbles during poland s hyperinflation implications and empirical evidence by m funke s hall and m sola a number of papers have tested for rational bubbles in the post world war i hyperinflation in germany the present paper henceforth fhs does so in poland around the time of the big bang it finds some evidence that the main determination of the hyperinflation was a rational bubble but cautiously notes that conventional structural models might also explain the hyperinflation i salute their technically sophisticated investigation of this interesting question but in the end find their evidence distinctly less suggestive of bubbles than do they this evidence comes from a nice extension of techniques suggested by diba and grossman 1984 and hamilton and whiteman 1985 and applied to the german hyperinflation by hamilton and whiteman 1985 using the cagan model that paper noted that in the absence of bubbles prices will have the same order of integration as does money if money is say z 2 so that what is stationary is changes in the growth rate of money but not the growth rates themselves then prices should be z 2 as well but bubbles cause explosive growth so no level of differencing will induce stationarity in a variable driven wholly or even in part by a bubble hamilton and whiteman 1985 found that prices and money appeared to be z 2 in the german hyperinflation and concluded that bubbles probably were not present evans 1991 in turn pointed out that if a bubbles periodically grow and collapse and b there are not a whole lot of observations during which the bubble was growing the hamilton and whiteman 1985 test will likely fail to find bubbles and tests are likely to find that prices and money are

long term contracting and multiple price systems this article examines product markets in which long term contracts and spot transactions coexist such markets are characterized by multiple price systems wherein adjustment to supply and demand shocks occurs through spot prices while contract prices are fixed or adjust slowly the authors derive the existence of contracts as well as the equilibrium fraction of spot trade in the framework of an optimizing model and analyze the effects of shocks on market equilibrium when some buyers and sellers locked in contractually the model is employed to interpret the change in the copper market from a multiple price system to one characterized solely by spot trade copyright 1992 by university of chicago press

inflation and currency reform expectations of currency reform are explicitly incorporated into a rational expectations version of the cagan model of money market equilibrium where expectations about the timing of reform are lerived from a simple government rule for choosing when to reform the currency the model is estimated for three of the episodes of hyperinflation that cagan investigated and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations

money demand the cagan model and the inflation tax some latin american evidence this paper examines the demand for money under conditions of very high inflation in argentina bolivia brazil chi le and peru during the 1970s and 1980s the authors test whether the monetary and inflationary experiences of these countries can be adequately characterized by the cagan 1956 model using an econometric procedure that is not reliant on any particular assumpti on concerning expectations formation except that forecasting errors are stationary the authors also examine the importance of foreign asset substitution in domestic portfolios and the hypothesis that monetary policy was tantamount to maximization of the inflation tax revenue before testing the rational expectations hypothesis copyright 1993 by mit press

measures of fit for rational expectations models this survey provides a detailed description of some of the recent theoretical and empirical literature on rational expectations econometrics the survey pays special attention to non stationarity of the data and to the various methods for evaluating rational expectations models that have been developed as alternatives to the classical statistical approach of testing overidentifying restrictions these methods have become very popular and widely used in empirical research we provide an illustration using danish stock market data and we summarize the many results obtained recently using these measures in areas as diverse as stock prices the term structure of interest rates exchange rates consumption and saving the balance of payments tax smoothing hyperinflation and linear quadratic adjustment cost models for inventories labour demand and money demand

testing for rational bubbles with exogenous or endogenous fundamentals the german hyperinflation once more 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

expectations in an open economy hyperinflation evidence from germany 1921 23 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

market structure marketing method and price instability data for metals sold on commodity exchanges and at prices set by producers are used to test the relationship between the organization of markets and the behavior of prices on the production side the question is whether prices are more stable in concentrated industries and on the sales side the question is whether markets where buyers are consumers have more stable prices than those with consumers and speculators the recent increase in metal price instability is explained by changes in the market structure and organization variables foremost is increased reliance on commodity exchanges declines in concentration are of less importance

an alternate method of estimating the cagan money demand function in hyperinflation under rational expectations abstract an alternate method of estimating the cagan money demand function under rational expectations is presented the technique utilizes the side assumptions that 1 accurate contemporaneous information on the price level and money stock is available to individuals and 2 unobservable noise in the portfolio balance schedule is neglible the procedure has three main virtues first it is implemented without imposing restrictions on the money supply process second the procedure is extremely simple and economical third it admits a simple test of a restriction implied by the cagan money demand function results are related to issues in recent hyperinflation studies

internal net worth and the investment process an application to u s agriculture recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending even after one controls for measures of firms investment opportunities while such evidence is suggestive it is often open to other interpretations we examine these models using data on equipment investment in the u s agricultural sector this sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment and reasonable measures of net worth can be constructed our findings provide support for a class of internal funds models of investment under asymmetric information

misspecification versus bubbles in hyperinflation data monte carlo and interwar european evidence abstract this paper analyzes some new tests of the cagan hyperinflation money demand model which have several advantages relative to those in the literature they do not confound specification error with rational bubbles can be implemented with a linear procedure and are frequently able to detect periodically collapsing bubbles which have challenged existing tests after a monte carlo analysis the tests are applied to data from hyperinflations in austria germany hungary and poland evidence of misspecification is found for austria germany and hungary while the model without a rational bubble component appears to fit the data for poland

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

leading bureaucracies to the tipping point an alternative model of multiple stable equilibrium levels of corruption we present a novel model of corruption dynamics in the form of a nonlinear optimal dynamic control problem it has a tipping point but one whose origins and character are distinct from that in the classic schelling 1978 model the decision maker choosing a level of corruption is the chief or some other kind of authority figure who presides over a bureaucracy whose state of corruption is influenced by the authority figure s actions and whose state in turn influences the pay off for the authority figure the policy interpretation is somewhat more optimistic than in other tipping models and there are some surprising implications notably that reforming the bureaucracy may be of limited value if the bureaucracy takes its cues from a corrupt leader

effects of forward sales on spot markets pre commitment sales and prices for fresh strawberries increasingly agricultural markets are vertically coordinated often a thinning spot market coexists with coordinated transactions raising the question of how private coordination affects the market as a whole one of the greatest challenges when analyzing such market level effects is obtaining information on private transactions we utilize publicly available data to evaluate how informal contracts in the fresh strawberry market affect spot market prices using a generalized autoregressive conditional heteroskedastic in mean garch m model we find that these informal contracts increased spot prices as argued by some industry members while the effect on spot price volatility varied by production region

supply shocks and price adjustment in the world oil market understanding the impacts of transitory oil supply shocks on world oil prices is crucial to the evaluation of the economic impacts of shocks and the design of policy responses to address those impacts this paper integrates short run and long run approaches to oil price determination with particular emphasis on the two price structure of the world oil market with coexisting short term spot prices and long term contract prices even transitory shocks are shown to exhibit persistence effects on long term prices some implications for econometric models of the relationship between spot and contract prices are discussed

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

testing for rational inflationary bubbles the case of argentina brazil and israel in this paper it is examined whether the existence of rational bubbles can explain the dynamics of the price level during the argentine brazilian and israeli high inflations in the first half of the 1980s based on the cagan 1956 money demand model the west 1987 specification test finds evidence of rational inflationary bubbles in the three countries when the money supply is assumed to be exogenous however if endogeneity of money is taken into account there is no evidence of rational bubbles

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

optimal dynamic law enforcement abstract in this paper we present an intertemporal extension of becker s journal of political economy 76 1968 169 static economic approach to crime and punishment for a dynamic supply of offenders we determine the optimal dynamic trade off between damages caused by offenders law enforcement expenditures and cost of imprisonment by using pontryagin s maximum principle we obtain interesting insight into the dynamical structure of optimal law enforcement policies it is found that inherently multiple steady states are generated which can be saddle points unstable points and boundary solutions as in other non linear control models there exists a threshold a so called skiba point which makes the optimal enforcement policy dependent on the initial conditions it turns out that above the skiba point the optimal trade off between social costs implies a steady state with a high level of offences while below the threshold the optimal law enforcement should eradicate crime

testing for cointegration abstract monte carlo experiments indicate that temporal disaggregation often yields significant power increases in augmented dickey fuller cointegration tests this result is contrary to the properties of adf unit root tests and is robust to several lag specifications and test misspecifications

cagan s model of hyperinflation under rational expectations this paper studies p cagan s model of the german hyperinflation under the hypothesis that adaptive expectations are rational it shows that inference about the key money demand elasticity parameter a is very senstitive to the specification of the dynamic interaction of the unobserved money demand shock with prices and money in particular if t j sargent s 1977 specification is modified then his basic conclusions are overturned identification of a does not require prior knowledge about the covariance of unobserved shock terms and d ata on the german hyperinflation imply a sharp not loose estimate of a which is of plausible magnitude finally informal tests indicate that modifying sargent s specification gives rise to improved model fit copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

misspecification versus bubbles in hyperinflation data comment abstract in this article i critically review some of the claims and analyses made by hooker j int money financ 19 2000 583 in his study of the cagan hyperinflation model i argue that i contrary to what hooker claims cointegration tests can be used to discriminate between bubbles and no bubbles ii contrary to hooker s claim his empirical results for the interwar european hyperinflations do not in general imply that the cagan model is misspecified iii although hooker s analyses build directly on the durlauf and hall bounds on the variances of specification errors in models with expectations nber working paper 2936 massachusetts cambridge 1989 methodology he neglects an important part of that methodology namely the measurement of the magnitude of noise i present such measures and together with reported cointegration tests the noise measures help reinterpreting hooker s empirical results

bubble weak and strong hyperinflation theory and empirical evidence the monthly continuous inflation rate that maximizes the inflation tax revenue varies widely from 18 3 to 143 according to semi elasticity estimates for the german hyperinflation made by several authors cagan 1956 barro 1970 frenkel 1977 sargent 1977 goodfriend 1982 burmeister and wall 1987 christiano 1987 casella 1989 taylor 1991 engsted 1993 imrohoroglu 1993 michael et al 1994 those estimates lead one to conclude that during hyperinflation the german government could have obtained more tax revenue with lower inflation rates

misspecification and bubbles in hyperinflation data reply to engsted engsted 2003 takes issue with several aspects of hooker 2000 mainly he objects to the statement that cointegration tests cannot be implemented when bubbles exist draws different conclusions than i did from my bubble test evidence and faults the paper s failure to include measures of the magnitude of model noise in this reply i focus mostly on interpreting the evidence where we have substantive disagreement that i believe is largely a result of differing priors regarding cointegration tests in the presence of bubbles in practice researchers may of course infer that a differenced bubble is stationary even though it will not be and apply cointegration tests my statement was simply intended to draw attention to this issue and highlight concerns about test properties what is particularly helpful in assessing the usefulness of a test under such conditions is a monte carlo analysis like the one included in my paper which gives readers a way to judge for themselves the efficacy of the test under different scenarios on the last point i agree with engsted on the merits of model noise measures and i find those he reports a useful contri

the monetary dynamics of sustained high inflation taiwan 1945 1949 taiwan experienced a sustained period of very high price inflation in the period 1945 1949 which led to an eventual rise in prices even greater than that experienced during some of the classic european hyperinflations analyzed by cagan 3 and others makinen and woodward 22 90 note that on the list of recognized hyperinflations one will not find taiwan but nevertheless argue that this episode should be classed as such although the average rate of taiwanese inflation during this period was not as high as in the episodes examined by cagan the very length of the period during which inflation remained high singles the taiwanese experience out as an extremely interesting period for analysis by monetary economists in this paper a primary aim is to examine whether the salient features of the demand for money during this period can be adequately characterized by an application of cagan s model of money demand under conditions of hyperinflation in particular we apply a test of cagan s model which is not contingent on any particular assumption concerning expectations formation except that agents errors in forecasting inflation are stationary using these first stage estimates we then examine subject only to the same weak assumption of stationary forecasting errors the hypothesis that the monetary authorities expanded the money supply in such a way as to maximize the inflation tax revenue ensuing from money creation finally we test the rational expectations version of the hyperinflation model of money demand the remainder of the paper is set out as follows in section ii we discuss the background to the taiwanese hyperinflation of 1945 1949

optimal control of interacting systems with dnss property the case of illicit drug use abstract in this paper we generalize a one dimensional optimal control problem with dnss property to a two dimensional optimal control problem this is done by taking the direct product of the model with itself i e we combine two similar system dynamics under a joint objective functional that is separable in both states and controls this framework can be applied to the construction of various optimal control problems such as optimal marketing of related products optimal growth of separate but interacting economies or optimal control of two related capital stocks we study such a system for a particular case drawn from the domain of drug control the main result of this paper is that in this domain even a modest amount of interaction can sometimes make a very big difference hence drawing conclusions by simplifying the real world into two independent one dimensional models may be problematic methodologically the combination of two systems with dnss property leads to a fascinating series of situations with multiple optimal steady states and associated threshold behavior these instances reflect some important recent developments in optimal dynamic control theory

market price uncertainty risk aversion and procurement combining contracts and open market sourcing alternatives abstract we evaluate the implications of concurrent utilization of contracts and open market arrangements by a risk averse buyer in continuous procuring of a standardized product of known demand over a specified time period the buyer being risk averse is concerned about the magnitude and uncertainty of expenses the contract price is deterministic and the market price is stochastic cases when the two price processes are exogenous and when the contract price is endogenously linked to volume of procurement and market price are examined models are developed to determine the optimal pattern of procurement from the two arrangements for specified price risk aversion and contract duration parameters the study finds that optimal procurement from market increases with contract price premium but decreases with degree of risk aversion and market price uncertainty usefulness of alternate forms of contracts when contract and market alternatives are used concurrently is discussed application of the models to hypothetical datasets compares the relative usefulness of alternate forms of integrating contract and market alternatives and of complete reliance on contract or market alternatives