st: Re: Transforming Inflation

[ajjee <ajjee1@yahoo.com>]

Thanks Nick

You are absolutely right about the second formula....i was computing the
wrong. The correct formula is 
transformed_inflation=(inflation/100)/((100 +inflation)/100), as you
mentioned. And this has no sign problems.

Thanks again

ajjee



On 25 March 2011 19:57, Nick Cox <njcoxstata@gmail.com> wrote:
Deflating inflation! Can you do it for real too?

Applying that transform is indeed quite absurd for negative values;
note that it is undefined for x = -1. I don't think there is any
singularity at 1% deflation.

A generalisation that makes the transform symmetric about zero is

sign(x) * abs(x)/(1 +abs(x))

By intent, this is monotonic and preserves sign, which seem
economically reasonable too.

I discuss a bundle of related issues in

Cox, N.J. 2011. Stata tip 96: Cube roots.
The Stata Journal 11(1): 149-154.

I make a case for cube roots being the simplest shape-changing
transformation that preserves sign and is applicable to negative, zero
and positive values alike.

Shouldn't the second formula be

transformed_inflation=(inflation/100)/((100 +inflation)/100)

On Fri, Mar 25, 2011 at 6:40 PM, ajjee <ajjee1@yahoo.com> wrote:

> My question is not related to Stata but I have a technical problem in
> computing a variable. In estimation, normally we transform our inflation
> variable to reduce the influence of extreme observations by the formula:
>
> transformed_inflation=(inflation)/(1+inflation)  or sometime
> transformed_inflation=(inflation/100)/((1+inflation)/100)
>
> But if the value of the variable is negative, say (-1.0666355), the
> resultant value is (16.00701) by the first formula which is misleading.
> What
> should be done in this situation?




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