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High Inflation Dynamics: Integrating Short­-Run Accommodation and Long­-Run Steady-­States

Author

Listed:
  • Michael Bruno

    (The World Bank)

  • Rafi Melnick

    (Bank of Israel)

Abstract

The paper develops a model for the analysisof high inlfation phenomena. A central feature in of the model is the joint determination ofthe long­run steady­state rateofinlfation andofthe short­run dynamic processofinlfation. The model includes a formal structure that is based on a simple, but powerful theorem: for a non­stationary (unitroot) inflationary process a price level shock eventually translates into a higher steady state rate of inflation which equals the ratio of the shock to the mean lag of inflation. The econometric approach is based on the apparent non­-stationary behavior of the rates of change of the nominal variables in high inflation countries (prices, wages, exchange­-rate and money). An application for the inflationary process in Israel during 1964-­1993 is presented.

Suggested Citation

  • Michael Bruno & Rafi Melnick, 1995. "High Inflation Dynamics: Integrating Short­-Run Accommodation and Long­-Run Steady-­States," Bank of Israel Working Papers 1995.06, Bank of Israel.
  • Handle: RePEc:boi:wpaper:1995.06
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    File Function: First version, 1995
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    References listed on IDEAS

    as
    1. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    3. Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
    4. Melnick, Rafi, 1995. "Financial Services, Cointegration, and the Demand for Money in Israel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 140-153, February.
    5. Michael Bruno & Stanley Fischer, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 353-374.
    6. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
    7. Bruno, Michael, 1989. "Econometrics and the Design of Economic Reform," Econometrica, Econometric Society, vol. 57(2), pages 275-306, March.
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