A MARKOV SWITCHING MODEL FOR THE HUNGARIAN PRICE STABILIZATION PLAN OF 1924

This paper compares the goodness of fit of a linear ar(1) model and a Markov ar(1) alternative using data on the inflation rate during the H ungarian hyperinflation (August 1921-March 1994) and stabilization (Ma rch 1924-November 1926) periods. First, in-sample forecasting measures (RMSE and MAPE) indicate that the Markov ar(1) uniformly dominates th e linear ar(1) for horizons of one to ten periods. Second, bootstrappe d samples yield a likelihood ratio test statistic which easily rejects the linear ar(1) in favor of the Markov ar(1) alternative.