Inflation and Its Unpredictability--Theory and Empirical Evidence
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.
Volume (Year): 25 (1993)
Issue (Month): 4 (November)
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