Rational and Adaptive Expectations in the Present Value Model of Hyperinflation

The Effects of Expected Transport Improvements on Housing Prices

“…Muth (1961) proposed a rational expectation model, which argued that people would base their forecasts on all of the information available rather than simply on past information. Numerous attempts, such as those by Beladi et al (1993), Revankar (1980), Shaw (1984), Lovell (1986), Abebayehu and Frederick (1993), Clayton (1996Clayton ( , 1997, Tsolacos and McGough (1999) and Hui and Lui (2002), have been made to test the rational expectation hypothesis econometrically on macroeconomic time series. Instead of arguing which model is correct, this paper adopts a panel data approach to let the data show when the price expectation effects are formed.…”

Expectations in an open economy hyperinflation: Evidence from Germany 1921–23

“…In their approach to expected inflation in hyperinflation episodes Beladi et al (1993) used a Cagan (1956-type demand for real monetary balances of the following form:…”

“…They then test the conditions of the two expectations hypotheses with reference to the 1920's hyperinflations in Germany, Poland and Hungary. In their empirical analysis, Beladi et al (1993) use a Cagan (1956)type demand for money function in which money is substitutable only with goods and report that in the case of Germany the data is consistent with the AE hypothesis. The Cagan demand for money is consistent with the so-called fiscal view, according to which German hyperinflation was due exclusively to money financing of huge government deficits.…”

“…The prevailing explanations of hyperinflation episodes employ money demand functions in which expectations formation is assumed a priori to be either adaptive (AE) or rational (RE), and are almost always measured expost using a time series approach, as in Cagan (1956) and Sargent and Wallace (1973), or a market based approach, as in Frenkel (1977) and Webb (1986). 1 One of the few contributions in which an attempt is made to determine ex-ante the type of expectations present in hyperinflation episodes is due to Beladi et al (1993) who employ Chow's (1989) method to establish the correctness conditions for the presence of AE or RE expectations in the demand for money. They then test the conditions of the two expectations hypotheses with reference to the 1920's hyperinflations in Germany, Poland and Hungary.…”

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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.

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