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Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries

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Author Info
Donal Bredin (University College Dublin)
Stilianos Fountas (University of Macedonia and National University of Ireland)

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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 the last forty years. 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., by short-run inflation uncertainty

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 125.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:125

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Related research
Keywords: Inflation; Inflation uncertainty; Markov process; regime-switching heteroskedasticity;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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