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).