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Inaccurate approximation in the modelling of hyperinflations

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  • Moffatt, Peter G.
  • Salies, Evens

Abstract

In time series macroeconometric models, the first difference in the logarithm of a variable is routinely used to represent the rate of change of that variable. It is often overlooked that the assumed approximation is accurate only if the rates of change are small. Models of hyper-inflation are a case in point, since in these models, by definition, changes in price are large. In this letter, Cagan's model is applied to Hungarian hyper-inflation data. It is then demonstrated that use of the approximation in the formation of the price inflation variable is causing an upward bias in the model's key parameter, and therefore an exaggeration of the effect postulated by Cagan.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33732.

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Date of creation: Dec 2006
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Handle: RePEc:pra:mprapa:33732

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Keywords: hyperinflation; model specification; difference in logarithms;

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  1. Sargent, Thomas J & Wallace, Neil, 1973. "Rational Expectations and the Dynamics of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 328-50, June.
  2. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  3. Salemi, Michael K., 1979. "Adaptive expectations, rational expectations, and money demand in hyperinflation Germany," Journal of Monetary Economics, Elsevier, vol. 5(4), pages 593-604, October.
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