The sequence in which this analysis is developed, in particular presenting the economics of
unanticipated inflation before that of anticipatory inflation, corresponds to the temporal sequence of economic events during an inflation.
where GY is the growth rate of real GNP, CVI is a measure of inflation uncertainty, SHOCKI is
unanticipated inflation, ANTI is anticipated inflation,(5) computed as the difference between actual and unanticipated values, and [[mu].sub.t], is a white noise error term.
It has been advocated by Ansley (1979) and Weiss (1985) that reserve error misestimation is caused largely by
unanticipated inflation in the costs of settling claims.
The average rate of
unanticipated inflation is -0.48 percent (t = -.92) for LIV and -1.04 percent (t = -1.96) for LEASTSQ.
Parks [1978] found
unanticipated inflation to be positively associated with movements in relative prices.
(These assumptions on Dln(y) and Dln(R) were tested by Rasche.) Instead of the price variable of equation (3), Rasche uses as a measure of
unanticipated inflation the residuals from an ARIMA (0,1,1) model.
The costs of inflation are associated with both anticipated and
unanticipated inflation. (4)
Traditionally, the biggest risk for an investor choosing to lend to governments or companies over a longer time frame, rather than opting for a series of short term securities, is the threat of
unanticipated inflation. Hence, the 'underweight' in bonds as an asset class, both in our strategic, as well as our tactical asset allocation recommendation."
Unanticipated inflation is a risk that investors in any nominal instrument face.
Keywords: Anticipated inflation
Unanticipated inflation Relative price variability Macroeconomic framework
Friedman [21] criticized this exploitation of the short-term inflation-unemployment trade-off, remarking that the temporary trade-off between inflation and unemployment "comes not from inflation per se, but from
unanticipated inflation, which generally means, from a rising rate of inflation." However, there is no permanent trade-off; hence governments should not employ the policy to stimulate employment with inflation.
Unanticipated inflation occurs when people, businesses and governments make errors in their inflation forecasts.