Inflation and Its Unpredictability--Theory and Empirical Evidence

Meyer Ungar and Ben-Zion Zilberfarb

Journal of Money, Credit and Banking, 1993, vol. 25, issue 4, 709-20

Abstract: 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.

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:25:y:1993:i:4:p:709-20

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