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.
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Volume (Year): 25 (1993)
Issue (Month): 4 (November)
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- 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.
- 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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- 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.
- 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.
- 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.
- Demetriades, Panikos, 1988. "Macroeconomic aspects of the correlation between the level and variability of inflation," Economics Letters, Elsevier, vol. 26(2), pages 121-124.
- Glezakos, Constantine & Nugent, Jeffrey B., 1984. "Price instability and inflation: The Latin American case," World Development, Elsevier, vol. 12(7), pages 755-758, July.
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