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Analyzing Rational Inflationary Bubbles, The Case of Iran (1961-2007)
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Abolghsem Esna-ashari *   , Vahid Taghinejad Omran , Mohammad Reza Babaee Semiromi |
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Abstract: (16605 Views) |
| Economic stability is one of the basic tasks of Government. Inflation is the main root of macroeconomic oscillations. The price bubble is one of the factors in price oscillations. The price bubble is the difference between fundamental price and market price of goods and services. Rational inflationary bubbles emerge under the condition of rational expectations.
We examine the non-exogeneity of money supply towards inflation with Engle-Granger Causality test. In order to test the existence of rational inflationary bubbles by using the West Specification test (1987), Cagan (1956) demand for money under the two scenarios of full and limited information are compared using the Wald test.
We find money supply is exogenous towards inflation and the non-bubble hypothesis of no bubbles in Iran is not rejected based on Cagan money demand function (1956). The West (1987) Specification Test finds no significant evidence of rational inflationary bubbles in Iran (1961-2007). |
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| Keywords: Inflationary Bubbles, Rational Expectations, West Specification Test |
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Type of Study: Research |
Subject:
General
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