Inaccurate approximation in the modelling of hyperinflations

Moffatt, Peter G. and Salies, Evens (2006): Inaccurate approximation in the modelling of hyperinflations. Published in: Quality & Quantity , Vol. 40, No. 6 : pp. 1055-1060.

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: MPRA Paper
• Language: English
• Keywords: hyperinflation; model specification; difference in logarithms
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; B - History of Economic Thought, Methodology, and Heterodox Approaches > B1 - History of Economic Thought through 1925 > B16 - Quantitative and Mathematical; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

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