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Does the Lucas critique apply during hyperinflation?: empirical evidence from four hyperinflationary episodes

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Abstract:

Farmer (Review of Economic Studies, 58 , 321-32, 1991) suggests that in a model in which there are multiple rational expectations equilibria agents may find it useful to coordinate their expectations in a unique rational expectations equilibrium which is supported by a self-fulfilling forecast rule having the property of being immune to the Lucas Critique. In this paper, Farmer's hypothesis is tested using data from hyperinflationary episodes. It is believed that those episodes are suitable for testing this hypothesis because an agent who lives in a hyperinflationary environment usually faces frequent changes in policy regime. The agent may thus choose a selffulfilling forecast rule which is immune to the Lucas Critique as a way of hedging against unanticipated policy regime switches. The empirical results show mixed evidence on Farmer's hypothesis during the hyperinflationary episodes studied.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840110096831

Publication date: July 20, 2002

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