TAIL INDEX STABILITY AND THE YUGOSLAV HYPERINFLATION EPISODE

Zorica MLADENOVIC (University of Belgrade)

The purpose of this paper is to analyze the volatility dynamics of the daily black market exchange rate during the Yugoslav hyperinflation episode. It is one of the recent hyperinflations that was recorded during the period: 1992 - 1994, which was historically unique due to its extreme peak and duration.

The approach we follow focuses on the tail behavior of the empirical distribution under investigation. Tail shapes are characterized by the tail index that measures the amount of tail-thickness of the given distribution. In this paper tail index of the exchange rate depreciation is estimated by the Hill (1975) method, while the tail index stability is tested by the recursive and rolling procedures of Quintos, Fan and Phillips (2001).

The results are the following. The empirical distribution of the exchange rate depreciation was found to be thick-tailed. However, the empirical distribution changed over time, such that a thick tail appeared only in the last two months of hyperinflation. As earlier econometric studies have demonstrated that exchange rate was fueled by money supply, we may conclude that exchange rate reacted with high volatility to the activity of the Central Bank. It could be argued that part of this volatility is actually due to the Central Bank's loss of control over the money supply process.