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Inflation and inflation uncertainty: Evidence from two Transition Economies

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This paper examines the causal link between inflation and inflation uncertainty for the transition economies of Russia and Ukraine. The Iterated Cumulative Sums of Squares Exponential Generalized Autoregressive Conditional Heteroskedasticity (ICSS-EGARCH-M-t) models that allow for asymmetry and regime shifts in the variance of inflation are employed to establish the inflation-inflation uncertainty causal relationship. We find three breaks in the inflation volatility series that coincide with the major historical events in these two countries. The empirical results reveal strong support of the Friedman-Ball hypothesis in both countries. Additionally, we discover that the reverse causal relation between inflation and inflation uncertainty as predicted by the Holland hypothesis holds in Ukraine, but this stabilization policy behavior does not seem to prevail in Russia.

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Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2011_05.

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Date of creation: Apr 2011
Date of revision: Apr 2011
Handle: RePEc:mcd:mcddps:2011_05

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Web page: http://www.uom.gr/index.php?tmima=3

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Keywords: transition economies; inflation; inflation uncertainty; ICSS-EGARCH-t.;

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