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Inflation and inflation uncertainty: evidence from the Caribbean region

  • James E. Payne

Purpose – The purpose of this paper is to extend the literature on the relationship between inflation and inflation uncertainty by examining three Caribbean countries: the Bahamas, Barbados, and Jamaica. Design/methodology/approach – ARMA-GARCH models are used to estimate inflation uncertainty along with Granger-causality tests to infer the relationship between inflation and inflation uncertainty. Findings – The results reveal that both the Bahamas and Jamaica exhibit a high degree of volatility persistence in response to inflationary shocks, while Barbados has a much lower persistence measure. Granger-causality tests indicate that an increase in inflation has been a positive impact on inflation uncertainty for each country. However, an increase in inflation uncertainty yields a decrease in inflation in the case of Jamaica. In summary, the results for the Bahamas and Barbados support the Friedman-Ball hypothesis, whereas the results for Jamaica support Holland's stabilization-motive hypothesis. Research limitations/implications – Future research on inflation and inflation uncertainty can be extended to incorporate possible regime shifts associated with fiscal and monetary policy. Originality/value – The study fills a void in the literature with respect to the inflation-inflation uncertainty nexus for Caribbean countries. The results of the paper may be useful to policymakers in the formulation of fiscal and monetary policy.

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Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 35 (2008)
Issue (Month): 6 (November)
Pages: 501-511

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Handle: RePEc:eme:jespps:v:35:y:2008:i:6:p:501-511
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