An empirical investigation of price and exchange rate bubbles during the interwar European hyperinflations

Abstract

This study attempts to test for the presence of price and exchange rate bubbles during the interwar European hyperinflations of Germany, Hungary, and Poland. We suggest a testing methodology, which extends the Durlauf–Hooker approach, for conducting this empirical study. Exact Cagan hyperinflation models under rational expectations are rejected and evidence of neither price nor exchange rate bubbles can be found for the three countries examined.