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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. Arthur M. Okun, 1971. "The Mirage of Steady Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 2(2), pages 485-498.
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    7. 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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