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Does inflation uncertainty increase with inflation?


  • John E. Golob


One of the most important costs of inflation is the uncertainty it creates about future inflation. This uncertainty clouds the decisionmaking of consumers and businesses and reduces economic well-being. Without this uncertainty, consumers and businesses could better plan for the future. According to many analysts, uncertainty about future inflation rises as inflation rises. As a result, these analysts argue that the Federal Reserve could reduce inflation uncertainty by reducing inflation. Other analysts argue that high inflation creates no more uncertainty than low inflation, as long as inflation remains stable. As a result, these analysts argue that high inflation does not necessarily interfere with decisionmaking or reduce economic well-being.> Golob reviews the results of previous research and presents new empirical evidence finding that inflation uncertainty rises with inflation.

Suggested Citation

  • John E. Golob, 1994. "Does inflation uncertainty increase with inflation?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 27-38.
  • Handle: RePEc:fip:fedker:y:1994:i:qiii:p:27-38:n:v.79no.3

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    References listed on IDEAS

    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    2. George A. Kahn, 1994. "Achieving price stability: a 1993 report card," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-18.
    3. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
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    6. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    7. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    9. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters,in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
    10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Carlos Fernández, 2001. "Further Evidence on Friedman's Hypothesis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 38(115), pages 257-273.
    2. Gregory D. Hess & Charles S. Morris, 1996. "The long-run costs of moderate inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 71-88.
    3. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2008. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," MPRA Paper 19488, University Library of Munich, Germany.
    4. Morales-Arias, Leonardo & Moura, Guilherme V., 2010. "A conditionally heteroskedastic global inflation model," Kiel Working Papers 1666, Kiel Institute for the World Economy (IfW).
    5. Ramprasad Bhar & Girijasankar Mallik, 2013. "Inflation uncertainty, growth uncertainty, oil prices, and output growth in the UK," Empirical Economics, Springer, vol. 45(3), pages 1333-1350, December.
    6. Berument, M. Hakan & Yalcin, Yeliz & Yildirim, Julide, 2012. "Inflation and inflation uncertainty: A dynamic framework," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4816-4826.
    7. Syed Kumail Abbas Naqvi & Bushra Naqvi, 2010. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 1-33, Jul-Dec.
    8. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2009. "Inflation Volatility: An Asian Perspective," MPRA Paper 19489, University Library of Munich, Germany.
    9. repec:eco:journ1:2017-05-24 is not listed on IDEAS
    10. B. Balaji & S. Raja Sethu Durai & M. Ramachandran, 2016. "The Dynamics Between Inflation and Inflation Uncertainty: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(1), pages 1-14, June.
    11. Berument, Hakan & Yalcin, Yeliz & Yildirim, Julide, 2009. "The effect of inflation uncertainty on inflation: Stochastic volatility in mean model within a dynamic framework," Economic Modelling, Elsevier, vol. 26(6), pages 1201-1207, November.
    12. Sweidan, O.D., 2004. "Does Inflation Harm Economic Growth in Jordan?. An Econometric Analysis for the Period 1970-2000," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(2), pages 41-66.
    13. Sharon Kozicki & Barak Hoffman, 1999. "Implications of rounding and rebasing for empirical analysis using consumer price inflation," Research Working Paper 99-08, Federal Reserve Bank of Kansas City.
    14. Katrakilidis, Constantinos P. & Tabakis, Nikolaos M., 2004. "Macroeconomic Uncertainty and Sectoral Output Performance: Empirical Evidence from Greece," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 5(1), January.
    15. Sonsino, Doron & Regev, Eran, 2013. "Informational overconfidence in return prediction – More properties," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 72-84.
    16. Tabakis, Nikolaos M., 2001. "A Multivariate Model for the Relationship Between Agricultural Prices and Inflation Uncertainty: Evidence Using Greek Data," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 2(1), January.
    17. Hayford, Marc D., 2000. "Inflation Uncertainty, Unemployment Uncertainty and Economic Activity," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 315-329, April.

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