Inaccurate approximation in the modelling of hyper-inflations

Moffatt, Peter G. and Salies, Evens (2006) Inaccurate approximation in the modelling of hyper-inflations. Quality and Quantity, 40. pp. 1055-1060. ISSN 1573-7845

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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.

Item Type:	Article
Faculty \ School:	Faculty of Social Sciences > School of Economics
UEA Research Groups:	Faculty of Social Sciences > Research Groups > Behavioural Economics Faculty of Social Sciences > Research Groups > Applied Econometrics And Finance Faculty of Social Sciences > Research Centres > Centre for Behavioural and Experimental Social Sciences
Depositing User:	Gina Neff
Date Deposited:	13 Jan 2011 11:13
Last Modified:	14 Aug 2023 11:30
URI:	https://ueaeprints.uea.ac.uk/id/eprint/10940
DOI:	10.1007/s11135-005-5078-2

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