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Components of Inflation Uncertainty and Interest Rates: Evidence from Australia and New Zealand

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  • Ramaprasad Bhar

    ()
    (School of Banking and Finance, University of New South Wales, Sydney, NSW-2052, AUSTRALIA)

  • Girijasankar Mallik

    ()
    (School of Economics and Finance, University of Western Sydney, Private Bag 1797, Penrith South DC, NSW 1797, AUSTRALIA)

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    Abstract

    This paper tests an enhanced version of the Fisher hypothesis for Australia and New Zealand. This is achieved by extracting three components (structural, impulse and steady state) of inflation uncertainty using a structural time series model of inflation that includes an output gap as well. In general, there is a positive association between impulse uncertainty and nominal interest rates and a negative association between structural uncertainty and interest rates. However, the long run effect of inflation on interest rates is less than one and this indicates that Central Banks have some flexibility in their inflation-targeting strategies.

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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

    Volume (Year): 42 (2012)
    Issue (Month): 1 (March)
    Pages: 39-49

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    Handle: RePEc:eap:articl:v:42:y:2012:i:1:p:39-49

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    Keywords: GARCH; inflation uncertainty; interest rates;

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    1. Barthold, Thomas A & Dougan, William R, 1986. "The Fisher Hypothesis under Different Monetary Regimes," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 674-79, November.
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    13. Norman Cameron & Derek Hum & Wayne Simpson, 1996. "Stylized Facts and Stylized Illusions: Inflation and Productivity Revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 152-62, February.
    14. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
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    16. John H. Makin, 1981. "Anticipated Money, Inflation Uncertainty, and Real Economic Activity," NBER Working Papers 0760, National Bureau of Economic Research, Inc.
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