| Hyperinflations are economic anomalies that provide opportunities for testing of long-standing hypotheses in monetary theory and allow for studying of inflationary expectations. How these episodes emerge, what stops them and whether expectations are rational when we observe dramatic increases in money and prices are open questions. This dissertation examines the evidence from some recent experiences in three transition economies and attempts to explain the stylized facts of hyperinflationary episodes.; The empirical results obtained in this study support the Cagan model of money demand in the East European experiences of the 1990s. However, our results do not indicate that the rational expectations hypothesis holds during episodes of hyperinflation. To address this issue, we study a model of learning and hyperinflation in an attempt to better understand the volatility in movements of expectations, money, and prices.; The findings imply that the dynamics under neural network learning appear to support the outcome achieved under least squares learning reported in the earlier literature. Relaxing the assumption that inflationary expectations are rational, however, is essential since it improves the fit of the model to actual data from episodes of severe hyperinflation.; Simulations provide ample evidence that if equilibrium in the model exists, then the inflation rate converges to the low inflation rational expectations equilibrium. This suggests a classical result: a permanent increase in the government deficit raises the stationary inflation rate (Marcet and Sargent, 1989). |
