Inflation and inflation uncertainty: evidence from the Caribbean region

Abstract

PurposeThe purpose of this paper is to extend the literature on the relationship between inflation and inflation uncertainty by examining three Caribbean countries: the Bahamas, Barbados, and Jamaica.Design/methodology/approachARMA‐GARCH models are used to estimate inflation uncertainty along with Granger‐causality tests to infer the relationship between inflation and inflation uncertainty.FindingsThe results reveal that both the Bahamas and Jamaica exhibit a high degree of volatility persistence in response to inflationary shocks, while Barbados has a much lower persistence measure. Granger‐causality tests indicate that an increase in inflation has been a positive impact on inflation uncertainty for each country. However, an increase in inflation uncertainty yields a decrease in inflation in the case of Jamaica. In summary, the results for the Bahamas and Barbados support the Friedman‐Ball hypothesis, whereas the results for Jamaica support Holland's stabilization‐motive hypothesis.Research limitations/implicationsFuture research on inflation and inflation uncertainty can be extended to incorporate possible regime shifts associated with fiscal and monetary policy.Originality/valueThe study fills a void in the literature with respect to the inflation‐inflation uncertainty nexus for Caribbean countries. The results of the paper may be useful to policymakers in the formulation of fiscal and monetary policy.

Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model

“…Their Granger causality tests show that rising inflation increases inflation uncertainty and that rising inflation uncertainty increases inflation in all five countries thus supporting both the Friedman and Cukierman-Meltzer hypotheses. Payne (2008) uses ARMA-GARCH models to estimate inflation uncertainty and test for the relationship between inflation and inflation uncertainty using Granger causality tests for three Caribbean countries: the Bahamas, Barbados, and Jamaica. The results indicate that an increase in inflation leads to an increase in inflation uncertainty for the Bahamas and Barbados, supporting the Friedman-Ball hypothesis.…”

Inflation and Inflation Uncertainty Revisited: Evidence from Egypt

“…In the second step, a Granger causality test is performed to determine the direction of causality between the level of inflation and the generated inflation uncertainty measure from the first step. Among the studies that used this approach include Grier and Perry (1998) [13], Nas and Perry (2000) [31], Daal et al (2005) [14], Payne (2008) [32], and Karahan (2012) [17]. For example, Nas and Perry (2000) [31] examined the relation between inflation and inflation uncertainty in Turkey from 1960 to 1998 using the two-step procedure.…”

“…For example, Nas and Perry (2000) [31] examined the relation between inflation and inflation uncertainty in Turkey from 1960 to 1998 using the two-step procedure. Similarly, Payne (2008) [32] carried out a corresponding study of the Caribbean region.…”

How Sensitive is U.S.-Canadian Trade to the Exchange Rate: Evidence from Industry Data

“…7 Note that the bounds-testing approach was also used by Bahmani-Oskooee and Ardalani (2006). For other applications see of this approach see Bahmani-Oskooee and Hegerty (2007), Narayan et al (2007), Serletis and Gogas (2007), Tang (2007), Halicioglu (2007), Mohammadi et al (2008), Wong and Tang (2008), De Vita and Kyaw (2008), and Payne (2008).…”