Discovering the Link Between Inflation Rates and Inflation Uncertainty

The Links between Inflation and Inflation Uncertainty at the Longer Horizon

“…A longer horizon (at least one year) would be more appropriate. The available empirical evidence also suggests that considering long-term uncertainty is important; see Ball and Cecchetti (1990), Evans (1991), Evans and Wachtel (1993), Kim (1993).…”

“…For example, Evans (1991) augmented the GARCH modeling framework by assuming the parameters of his inflation model to be time-varying. Thus, he was able to distinguish several types of inflation uncertainty.…”

“…The reason for this is that not only changing variance (σ 2 ), but also time variations of other underlying parameters can contribute to the behavior of the long-horizon uncertainty (cf. Evans (1991), Lendvai (2006)). Cogley and Sargent (2001) note that "the well-known positive correlation between the mean and variance of inflation reflects an even stronger correlation between the mean and degree of persistence".…”

“…In stressing the role of the horizon and changing parameters this study follows Evans (1991). It can be viewed as a refinement and extension of Evans (1991) relying on some useful recent econometric techniques, with a more clear and universal definition of inflation uncertainty.…”

“…It can be viewed as a refinement and extension of Evans (1991) relying on some useful recent econometric techniques, with a more clear and universal definition of inflation uncertainty. Clearly stated definition based on an explicit forecasting framework is important as it allows to subject the chosen indicator to a series of procedures in order to verify its validity.…”