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Inflation and Its Unpredictability--Theory and Empirical Evidence

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  • Ungar, Meyer
  • Zilberfarb, Ben-Zion
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    Abstract

    The effect of inflation on its unpredictability is theoretically ambiguous. Arthur M. Okun (1971) and Milton Friedman (1977) suggest that the effect is positive. However, a negative effect may exist if higher inflation induces the relevant economic agents to invest more in generating accurate predictions. This paper provides a theoretical model to analyze these opposing arguments and specifies the conditions under which a positive effect exists. New survey data regarding inflationary expectations in Israel are used to empirically examine the model. The data, which allow single hypothesis testing of the relationship, reveal a positive effect only in periods of high inflation, indicating a possible threshold effect. Copyright 1993 by Ohio State University Press.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 25 (1993)
    Issue (Month): 4 (November)
    Pages: 709-20

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    Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:4:p:709-20

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    1. Pagan, A R & Hall, A D & Trivedi, P K, 1983. "Assessing the Variability of Inflation," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 585-96, October.
    2. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-27, December.
    3. Ibrahim, I B & Williams, Raburn M, 1978. "Price Unpredictability and Monetary Standards: A Comment on Klein's Measure of Price Uncertainty," Economic Inquiry, Western Economic Association International, vol. 16(3), pages 431-37, July.
    4. Demetriades, Panikos, 1988. "Macroeconomic aspects of the correlation between the level and variability of inflation," Economics Letters, Elsevier, vol. 26(2), pages 121-124.
    5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
    6. Pourgerami, Abbas & Maskus, Keith E., 1987. "The effects of inflation on the predictability of price changes in Latin America: Some estimates and policy implications," World Development, Elsevier, vol. 15(2), pages 287-290, February.
    7. Glezakos, Constantine & Nugent, Jeffrey B., 1984. "Price instability and inflation: The Latin American case," World Development, Elsevier, vol. 12(7), pages 755-758, July.
    8. Glezakos, Constantine & Nugent, Jeffrey B., 1987. "The relationship between the rate of inflation and its unpredictability in high inflation Latin American countries," World Development, Elsevier, vol. 15(2), pages 291-293, February.
    9. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
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