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Inflation, Inflation Uncertainty, and Markov Regime Switching Heteroskedasticity: Evidence from European Countries

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  • Don Bredin

    (University College Dublin, Ireland)

  • Stilianos Fountas

    (University of Macedonia, Thessaloniki, Greece)

Abstract

We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over a forty-year period. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman's belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., with short-run inflation uncertainty.

Suggested Citation

  • Don Bredin & Stilianos Fountas, 2021. "Inflation, Inflation Uncertainty, and Markov Regime Switching Heteroskedasticity: Evidence from European Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 19(2), pages 181-200.
    • Handle: RePEc:seb:journl:v:19:y:2021:i:2:p:181-200
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    References listed on IDEAS

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    Cited by:

    1. Neil Dias Karunaratne & Ramprasad Bhar, 2010. "Regime-Shifts & Post-Float Inflation Dynamics In Australia," Discussion Papers Series 405, School of Economics, University of Queensland, Australia.
    2. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú.

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    More about this item

    Keywords

    Inflation; Inflation uncertainty; Markov process; regime-switching heteroskedasticity;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E0 - Macroeconomics and Monetary Economics - - General

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