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Inflation and Its Unpredictability--Theory and Empirical Evidence

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  • Ungar, Meyer
  • Zilberfarb, Ben-Zion

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.

Suggested Citation

  • Ungar, Meyer & Zilberfarb, Ben-Zion, 1993. "Inflation and Its Unpredictability--Theory and Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 709-720, November.
  • Handle: RePEc:mcb:jmoncb:v:25:y:1993:i:4:p:709-20
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    References listed on IDEAS

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    1. 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.
    2. repec:bin:bpeajo:v:2:y:1971:i:1971-2:p:485-498 is not listed on IDEAS
    3. A. R. Pagan & A. D. Hall & P. K. Trivedi, 1983. "Assessing the Variability of Inflation," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 585-596.
    4. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, 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. 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 1022-1027, December.
    8. Glezakos, Constantine & Nugent, Jeffrey B., 1984. "Price instability and inflation: The Latin American case," World Development, Elsevier, vol. 12(7), pages 755-758, July.
    9. 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 431-437, July.
    10. Demetriades, Panikos, 1988. "Macroeconomic aspects of the correlation between the level and variability of inflation," Economics Letters, Elsevier, vol. 26(2), pages 121-124.
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