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AbstractAny measure of unobserved inflation uncertainty relies on specific assumptions which are most likely not fulfilled completely. This calls into question whether an individual measure delivers a reliable signal. To reduce idiosyncratic measurement error, we propose using common information contained in different measures derived from survey data, a variety of forecast models, and volatility models. We show that all measures are driven by a common component which constitutes an indicator for inflation uncertainty. Moreover, the idiosyncratic component of survey disagreement contains systematic measurement error during economic downturns. Finally, we study the Friedman-Ball hypothesis. Using the indicator, it turns out that higher inflation is followed by higher uncertainty. By contrast, we obtain contradictory results for the individual measures. We also document that, after an inflationary shock, uncertainty decreases in the first two months which is traceable to the energy component in CPI inflation.JEL Code: C53, E31, E37.
We investigate the international linkages of uncertainty associated with the long-term movements of inflation. In the first step, we establish that inflation uncertainty in the G7 is intertwined, and the degree of synchronization has increased during the recent two decades. We also document a rise in inflation uncertainty accompanying the global financial crisis. Based on a factor–structural vector autoregression, we provide evidence of a common international shock. We disclose that this shock is closely related to oil and commodity price uncertainty, and it explains large parts of the recent rise in inflation uncertainty. Moreover, increased synchronization can be explained by greater relative importance of this global shock. We also document that inflation uncertainty has become more stable, because domestic shocks translate less extensively into individual economies. This finding lends support to the “good policy” hypothesis.
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