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Uncertainty, Expectations, and Financial InstabilityReviving Allais's Lost Theory of Psychological Time$
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Eric Barthalon

Print publication date: 2014

Print ISBN-13: 9780231166287

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231166287.001.0001

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Allais’s HRL Formulation

Allais’s HRL Formulation

Illustration of Its Dynamic Properties by an Example of Hyperinflation (Zimbabwe 2000–2008)

(p.131) Chapter Seven Allais’s HRL Formulation
Uncertainty, Expectations, and Financial Instability

Eric Barthalon

Columbia University Press

This chapter illustrates the dynamic properties of the HRL formulation by means of a detailed numerical example based on the hyperinflation observed in Zimbabwe between 2000 and 2008. It first presents the results of dynamic equilibrium and dynamic disequilibrium simulations. It shows that the perceived rate of inflation converged asymptotically toward the instantaneous rate of inflation. This asymptotic convergence happens because the rate of memory decay grows exponentially and the elasticity of the perceived rate of inflation with respect to the instantaneous rate of inflation converges toward unity. The duration of the memory of inflation is also computed, along with the distribution of forecasting errors in the HRL formulation. Finally, the chapter examines how the HRL formulation sheds light on what Charles P. Kindleberger calls “some historical puzzles in macroeconomic behavior”.

Keywords:   hyperinflation, Zimbabwe, dynamic equilibrium, dynamic disequilibrium, inflation, memory decay, perceived rate of inflation, forecasting errors, HRL formulation, macroeconomic behavior

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