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On the nonlinear causality between inflation and inflation uncertainty in the G3 countries

Author

Listed:
  • Mehmet Balcilar

    (Eastern Mediterranean University)

  • Zeynel Abidin Ozdemir

    (Gazi University)

  • Esin Cakan

    (University of New Haven)

Abstract

This study examines the dynamic relationship between monthly inflation and inflation uncertainty in Japan, the US and the UK by employing linear and nonlinear Granger causality tests for the 1957:01-2006:10 period. Using a generalised autoregressive conditional heteroskedasticity (GARCH) model to generate a measure of inflation uncertainty, the empirical evidence from the linear and nonlinear Granger causality tests indicate a bidirectional causality between the series. The estimates from both the linear vector autoregressive (VAR) and nonparametric regression models show that higher inflation rates lead to greater inflation uncertainty for all countries as predicted by Friedman (1977). Although VAR estimates imply no significant impact, except for Japan, nonparametric estimates show that inflation uncertainty raises average inflation in all countries, as suggested by Cukierman and Meltzer (1986). Thus, inflation and inflation uncertainty have a positive predictive content for each other, supporting the Friedman and Cukierman-Meltzer hypotheses, respectively.

Suggested Citation

  • Mehmet Balcilar & Zeynel Abidin Ozdemir & Esin Cakan, 2011. "On the nonlinear causality between inflation and inflation uncertainty in the G3 countries," Journal of Applied Economics, Universidad del CEMA, vol. 14, pages 269-296, November.
  • Handle: RePEc:cem:jaecon:v:14:y:2011:n:2:p:269-296
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    Citations

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    Cited by:

    1. Claudiu T. Albulescu & Aviral Kumar Twari & Stephen M. Miller & Rangan Gupta, 2015. "Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data," Working Papers 201591, University of Pretoria, Department of Economics.
    2. Dejan Živkov & Jovan Njegic & Marko Pecanac, 2014. "Bidirectional linkage between inflation and inflation uncertainty – the case of Eastern European countries," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 124-139, December.
    3. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta, 2011. "Long- and Short-Run Relationships between House and Stock Prices in South Africa: A Nonparametric Approach," Working Papers 201136, University of Pretoria, Department of Economics.
    4. Nasr, Adnen Ben & Balcilar, Mehmet & Ajmi, Ahdi N. & Aye, Goodness C. & Gupta, Rangan & van Eyden, Reneé, 2015. "Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model," Emerging Markets Review, Elsevier, vol. 24(C), pages 46-68.

    More about this item

    Keywords

    inflation; inflation uncertainty; Granger-causality; nonlinear Granger-causality;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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