Empirical inflation models in developing countries: Sensitivity to the definition of inflation

Abstract

Previous developing country inflation studies have demonstrated that the Harberger (monetarist) model's explanatory power may be quite sensitive to the time period or explanatory variables used. In this study, the model's sensitivity to the definition of the inflation rate variable itself ‐ the dependent variable ‐ is investigated. Using a cross‐section, time‐series data set of 19 developing nations, it is shown that the Harberger model is sensitive to the manner in which inflation is defined. Then, a similar investigation is conducted for another, more recently developed, model of the inflationary process (the Hanson model). This model exhibits less sensitivity to the choice of inflation variable.

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