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Components of Inflation Uncertainty and Interest Rates: Evidence from Australia and New Zealand

Author

Listed:
  • Ramaprasad Bhar

    (School of Banking and Finance, University of New South Wales, Sydney, NSW-2052, AUSTRALIA)

  • Girijasankar Mallik

    (School of Economics and Finance, University of Western Sydney, Private Bag 1797, Penrith South DC, NSW 1797, AUSTRALIA)

Abstract

This paper tests an enhanced version of the Fisher hypothesis for Australia and New Zealand. This is achieved by extracting three components (structural, impulse and steady state) of inflation uncertainty using a structural time series model of inflation that includes an output gap as well. In general, there is a positive association between impulse uncertainty and nominal interest rates and a negative association between structural uncertainty and interest rates. However, the long run effect of inflation on interest rates is less than one and this indicates that Central Banks have some flexibility in their inflation-targeting strategies.

Suggested Citation

  • Ramaprasad Bhar & Girijasankar Mallik, 2012. "Components of Inflation Uncertainty and Interest Rates: Evidence from Australia and New Zealand," Economic Analysis and Policy, Elsevier, vol. 42(1), pages 39-49, March.
    • Handle: RePEc:eee:ecanpo:v:42:y:2012:i:1:p:39-49
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    More about this item

    Keywords

    GARCH; inflation uncertainty; interest rates;
    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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