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Inaccurate Approximation in the Modelling of Hyperinflations

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  • Peter Moffatt
  • Evens Salies

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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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Suggested Citation

  • Peter Moffatt & Evens Salies, 2006. "Inaccurate Approximation in the Modelling of Hyperinflations," Quality & Quantity: International Journal of Methodology, Springer, vol. 40(6), pages 1055-1060, December.
  • Handle: RePEc:spr:qualqt:v:40:y:2006:i:6:p:1055-1060 DOI: 10.1007/s11135-005-5078-2
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    References listed on IDEAS

    as
    1. Taylor, Mark P, 1991. "The Hyperinflation Model of Money Demand Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 327-351, August.
    2. 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 328-350, June.
    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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    More about this item

    Keywords

    difference in logarithms; hyperinflation; model specification;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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