TESTING FOR SUNSPOT EQUILIBRIA IN THE GERMAN HYPERINFLATION

In this paper I investigate whether the 1923 German hyperinflation was driven by market fundamentals or sunspots in the context of a linear rational expectations model. The theory suggests that hyperinflations can be explained as movements along the slippery side of a stochastic Laffer curve. Data from the German episode provide some overall support for the cross-equation restrictions of the model and its Laffer curve characterization. However, market fundamentals, not deterministic bubbles or sunspots, are found responsible for the explosiveness in the data.