Bidirectional Nexus between Inflation and Inflation Uncertainty in the Asian Emerging Markets – The GARCH-in-Mean Approach

This paper investigates the bidirectional linkage between inflation and its uncertainty (inflation volatility) in the selected ten emerging Asian countries. In order to measure inflation uncertainty as accurate as possible, we consider GARCH-in-Mean model with six different distribution functions. We find the existence of the transmission effect from inflation to its volatility, but in the majority of the countries this effect is relatively week, amounting around 13% or way below. Only in the cases of Indonesia, China and Iran the effect is somewhat higher, with the magnitude of 26%, 20% and 17%, respectively. Evidence about the spillover effect from inflation uncertainty to inflation is reported only in four countries – Korea, Thailand, Pakistan and China. Interestingly, our results suggest that the highest impact from inflation volatility to inflation is found in Korea and Thailand, i.e. in the countries which implemented prudent and accountable inflation targeting strategy two decades ago. Complementary rolling regression supports the GARCH-in-Mean findings, providing an additional information about how the selected hypotheses manifest themselves in different subperiods.