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

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  • Henry, Olan T.
  • Olekalns, Nilss
  • Suardi, Sandy

Abstract

The Friedman-Ball hypothesis implies a link between the inflation rate and inflation uncertainty. In this paper we employ a new test for the joint null hypothesis of no dependence effects and no asymmetry in the G7 inflation volatility. The results show that higher inflationrates operate additively via the conditional variance of inflation to induce greater inflation uncertainty in the U.S., U.K. and Canada. In addition, positive inflationary shocks are found to generate greater inflation uncertainty than negative shocks of a similar magnitude in the U.K. and Canada.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 94 (2007)
Issue (Month): 3 (March)
Pages: 383-388

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Handle: RePEc:eee:ecolet:v:94:y:2007:i:3:p:383-388

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  1. Davis, George K & Kanago, Bryce E, 2000. "The Level and Uncertainty of Inflation: Results from OECD Forecasts," Economic Inquiry, Western Economic Association International, vol. 38(1), pages 58-72, January.
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  3. Laurence Ball, 1990. "Why Does High Inflation Raise Inflation Uncertainty?," NBER Working Papers 3224, National Bureau of Economic Research, Inc.
  4. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
  5. Olan T. Henry & Sandy Suardi, 2004. "Testing for a Level Effect in Short-Term Interest Rates," Department of Economics - Working Papers Series 924, The University of Melbourne.
  6. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  7. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
  8. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
  9. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  10. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  11. Olan T. Henry & Nilss Olekalns & Sandy Suardi, 2005. "Equity Return and Short-Term Interest Rate Volatility : Level Effects and Asymmetric Dynamics," Department of Economics - Working Papers Series 941, The University of Melbourne.
  12. Daal, Elton & Naka, Atsuyuki & Sanchez, Benito, 2005. "Re-examining inflation and inflation uncertainty in developed and emerging countries," Economics Letters, Elsevier, vol. 89(2), pages 180-186, November.
  13. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  14. Apergis, Nicholas, 2004. "Inflation, output growth, volatility and causality: evidence from panel data and the G7 countries," Economics Letters, Elsevier, vol. 83(2), pages 185-191, May.
  15. Hwang, Y., 2001. "Relationship between inflation rate and inflation uncertainty," Economics Letters, Elsevier, vol. 73(2), pages 179-186, November.
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Cited by:
  1. WenShwo Fang & Stephen M. Miller & Chih-Chuan Yeh, 2007. "Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability," Working papers 2007-45, University of Connecticut, Department of Economics, revised Jun 2009.
  2. Wojciech Charemza & Carlos Diaz Vela & Svetlana Makarova, 2013. "Inflation fan charts, monetary policy and skew normal distribution," Discussion Papers in Economics 13/06, Department of Economics, University of Leicester.
  3. Tsyplakov Alexander, 2010. "The links between inflation and inflation uncertainty at the longer horizon," EERC Working Paper Series 10/09e, EERC Research Network, Russia and CIS.
  4. Korap, Levent, 2010. "Threshold GARCH modeling of the inflation & inflation uncertainty relationship: historical evidence from the Turkish economy," MPRA Paper 31765, University Library of Munich, Germany.
  5. Korap, Levent & Saatçioğlu, Cem, 2009. "New time series evidence for the causality relationship between inflation and inflation uncertainty in the Turkish economy," MPRA Paper 19246, University Library of Munich, Germany.
  6. Levent, Korap, 2009. "Enflasyon ve enflasyon belirsizliği ilişkisi için G7 ekonomileri üzerine bir inceleme
    [An investigation for the inflation and inflation uncertainty relationship upon the G7 economies]
    ," MPRA Paper 19478, University Library of Munich, Germany.

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