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Inflation Costs, Uncertainty Costs And Emerging Markets


  • William Miles

    () (Department of Economics, Wichita State University)

  • Samuel Schreyer

    () (Department of Economics, St. Cloud State University)


Given the costs to real output that inflation uncertainty has been shown to impose, two recent papers have investigated the interaction of inflation and uncertainty for a group of emerging market nations. Both papers find that an increase in inflation almost invariably increases uncertainty in developing countries. This finding accords with the Friedman hypothesis and with most results for industrialized countries. However, there is both theoretical and some tentative empirical evidence suggesting that, when inflation is high, and thus costly, an increase in inflation can spur greater investment in predicting the path of prices, and actually reduce rather than increase uncertainty. This possibility is particularly relevant for emerging markets, some of which have histories of high inflation. Using a somewhat different empirical methodology than previous authors, we find that inflation does indeed lower uncertainty at some horizons, and, as per theory, does so predominantly in those countries in our sample with the higher rates of inflation.

Suggested Citation

  • William Miles & Samuel Schreyer, 2009. "Inflation Costs, Uncertainty Costs And Emerging Markets," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 169-183, December.
  • Handle: RePEc:jed:journl:v:34:y:2009:i:2:p:169-183

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    References listed on IDEAS

    1. Kevin B. Grier & Ólan T. Henry & Nilss Olekalns & Kalvinder Shields, 2004. "The asymmetric effects of uncertainty on inflation and output growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(5), pages 551-565.
    2. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
    3. Grier, Robin & Grier, Kevin B., 2006. "On the real effects of inflation and inflation uncertainty in Mexico," Journal of Development Economics, Elsevier, vol. 80(2), pages 478-500, August.
    4. Caporale, Tony & McKiernan, Barbara, 1997. "High and variable inflation: Further evidence on the Friedman hypothesis," Economics Letters, Elsevier, vol. 54(1), pages 65-68, January.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
    7. Barnes, Michelle L & Duquette, Nicolas, 2006. "Threshold relationships among inflation, financial development, and growth," Journal of Financial Transformation, Capco Institute, vol. 17, pages 141-149.
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    More about this item


    Price Level; Inflation; Deflation; Macroeconomic Analyses of Economic Development;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development


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