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The impacts of regime-switching structures and fat-tailed characteristics on the relationship between inflation and inflation uncertainty

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  • Chang, Kuang-Liang

Abstract

A great of deal of study has explored the relationship between inflation and inflation uncertainty under the assumptions of normal distribution and no regime shift. This paper attempts to investigate whether changes in the specification of distribution specification and regime shifts will affect the inflation-uncertainty relationship. Empirical results show that these two factors have a vital effect on the inflation-uncertainty relationship. A specification with four states and the Student’s t distributed error terms can successfully describe the dynamics of the inflation rate. After taking the non-normal density and independent regime shifts into account, this paper finds that inflation uncertainty has no impact on inflation, regardless of inflation pressure. Inflation has a negative impact on inflation uncertainty during periods of high inflation volatility, while the impact of inflation on inflation uncertainty is insignificant during periods of low inflation volatility.

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  • Chang, Kuang-Liang, 2012. "The impacts of regime-switching structures and fat-tailed characteristics on the relationship between inflation and inflation uncertainty," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 523-536.
    • Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:523-536
    DOI: 10.1016/j.jmacro.2011.12.001
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    3. Barnett William A. & Jawadi Fredj & Ftiti Zied, 2020. "Causal relationships between inflation and inflation uncertainty," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(5), pages 1-26, December.
    4. Kushal Banik Chowdhury & Srikanta Kundu & Nityananda Sarkar, 2018. "Regime‐dependent effects of uncertainty on inflation and output growth: evidence from the United Kingdom and the United States," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(4), pages 390-413, September.
    5. Kushal Banik Chowdhury & Kaustav Kanti Sarkar & Srikanta Kundu, 2021. "Nonlinear relationships between inflation, output growth and uncertainty in India: New evidence from a bivariate threshold model," Bulletin of Economic Research, Wiley Blackwell, vol. 73(3), pages 469-493, July.
    6. Mehdi Hajamini, 2019. "Asymmetric Causality Between Inflation and Uncertainty: Evidences from 33 Developed and Developing Countries," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(2), pages 287-309, June.
    7. Kushal Banik Chowdhury & Nityananda Sarkar, 2015. "The Effect of Inflation on Inflation Uncertainty in the G7 Countries: A Double Threshold GARCH Model," International Econometric Review (IER), Econometric Research Association, vol. 7(1), pages 34-50, April.
    8. Jonathan A. Attey & Casper G. de Vries, 2016. "Monetary Policy in the Presence of Random Wage Indexation," Tinbergen Institute Discussion Papers 16-086/VI, Tinbergen Institute.
    9. 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.
    10. Liu, Xiaochun, 2019. "On tail fatness of macroeconomic dynamics," Journal of Macroeconomics, Elsevier, vol. 62(C).
    11. Georgios Bampinas & Panagiotis Konstantinou & Theodore Panagiotidis, 2021. "Reassessing the inflation uncertainty‐inflation relationship in the tails," Bulletin of Economic Research, Wiley Blackwell, vol. 73(4), pages 508-534, October.
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    More about this item

    Keywords

    Inflation; Inflation uncertainty; Distribution specification; Regime-switching structure;
    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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