A structural time series test of the monetary model of exchange rates under four big inflations

In this paper, the monetary model of exchange rate determination is tested using structural time series analysis under the Austrian, German, Hungarian and Polish hyperinflation episodes of the 1920s. The results obtained are highly supportive of this version of the monetary model, which explicitly allows for the phenomenon of currency substitution. They also show that the property of proportionality between the domestic money supply and the exchange rate cannot be rejected for Germany, Hungary and Poland. Furthermore, highly supportive evidence is found for the validity of the PPP relationship and the quantity theory of money, both of which are constituent components of the monetary model.