Inaccurate approximation in the modelling of hyperinflations

Peter Moffatt and Evens Salies

MPRA Paper from University Library of Munich, Germany

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.

Keywords: hyperinflation; model specification; difference in logarithms (search for similar items in EconPapers)
JEL-codes: B16 C51 E41 (search for similar items in EconPapers)
Date: 2006-12
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https://mpra.ub.uni-muenchen.de/33732/1/MPRA_paper_33732.pdf original version (application/pdf)

Related works:
Journal Article: Inaccurate approximations in the modeling of hyper-inflations (2006)
Journal Article: Inaccurate Approximation in the Modelling of Hyperinflations (2006)
Working Paper: Inaccurate approximation in the modelling of hyperinflations (2006)
Working Paper: Inaccurate approximation in the modelling of hyperinflations (2006)
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