State-space estimation of rational bubbles in the Yen Deutsche mark exchange rate

This paper considers a series that uncovered interest parity predicts to be white noise and inspects it for evidence of stochastic rational bubbles. S tate-space methods are used that specify a bubble component of the series a s an unobserved state. The technique's effectiveness is demonstrated by Mon te Carlo experiments. One span of the series is found in which a stochastic rational bubble specification clearly dominates the white noise specificat ion. It coincides with a period of general financial turmoil in the associa ted economies, i.e. Japan and Germany during 1989 ana early 1990. JEL no. C 15, C32, F31, G12.