Re-examining inflation and inflation uncertainty in developed and emerging countries

Abstract

This study examines the relationship between inflation and inflation uncertainty for both developed and emerging countries using the asymmetric power GARCH model. We find new evidence that suggests that positive inflationary shocks have stronger impacts on inflation uncertainty for mainly Latin American countries. We also find that inflation causes inflation uncertainty for most countries but the evidence for causality of the opposite direction is mixed.

Testing for rate dependence and asymmetry in inflation uncertainty: Evidence from the G7 economies

“…Our results for inflation rate dependence differ to some extent from those of Daal et al (2005) who found evidence to support the Friedman-Ball hypothesis for all countries except Germany. The contrasting results are most likely due to the difference in the econometric specification and tests employed in this study.…”

“…2 Nas andPerry (1998), Fountas (2001), Hwang (2001), Apergis (2004) and Kontonicas (2004) employ GARCH models in studying the relationship between inflation and its uncertainty. 3 See, amongst others, Grier and Perry (1998) and Daal et al (2005). absolute magnitude.…”

“…2 These models offer a direct test for the statistical significance of the time variation of inflation's conditional variance (Engle 1982); the causal relationship between inflation and inflation uncertainty, rate dependence (Grier and Perry, 1998); and differences in the response of inflation uncertainty to the sign and size of inflationary shocks, an asymmetry effect (Daal et al, 2005). Cox, Ingersoll and Ross (1985) provide two models for inflation dynamics both of which imply rate dependence; a positive correlation between the level of the rate of inflation and the volatility of inflation.…”

Testing for Conditional Heteroscedasticity in the Components of Inflation

“…These authors did not find empirical support for the Friedman hypothesis. However, it has been supported by Joyce (1995), Baillie et al (1996), Grier and Perry (1998), Kim and Nelson (1999), Kontonicas (2004), Conrad and Karanasos (2005) and Daal et al (2005) among many others. Finally, there are studies as, for example, Hwang (2001), that find a negative relationship between level of inflation and its future uncertainty.…”

The Links between Inflation and Inflation Uncertainty at the Longer Horizon

“…For example, Brunner and Hess (1993) (who suggested to take into account the asymmetry in the influence of shocks on the volatility), Baillie, Chung, and Tieslau (1996) (who used the ARFIMA-GARCH model featuring long memory), Kontonikas (2004), Fountas, Karanasos, and Kim (2006), Henry, Olekalns, and Suardi (2007). Probably the most representative study of this kind in terms of the number of countries is Daal, Naka, and Sanchez (2005). The study used CPI from 23 countries to estimate a model of inflation including the asymmetric power GARCH model for conditional variance.…”