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Measuring Interdependence of Inflation Uncertainty

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  • Seohyun Lee

    (KDI School of Public Policy and Management)

Abstract

The unprecedented policy responses during the Global Financial Crisis and European debt crisis may have increased uncertainty about inflation and strengthen the transmission of inflation uncertainty shocks from one country to another. This paper examines empirical methodologies to measure the strength of the interdependence of inflation uncertainty between the UK and the euro area. First, I estimate inflation uncertainty by ex post forecast errors from a bivariate VAR GARCH model and find that the inflation uncertainty exhibits non-Gaussian properties. In such cases, correlations and copulas to measure the interdependence could suffer from bias if endogeneity is not properly addressed. To identify structural parameters in an endogeneity representation of interdependence, I exploit heteroskedasticity in the data across different regimes determined by the ratio of variances. The estimation results corroborate that the strength of the propagation of inflation uncertainty amplifies during the crisis while the interdependence significantly weakens in the post-crisis period.

Suggested Citation

  • Seohyun Lee, 2025. "Measuring Interdependence of Inflation Uncertainty," Computational Economics, Springer;Society for Computational Economics, vol. 65(5), pages 2707-2741, May.
  • Handle: RePEc:kap:compec:v:65:y:2025:i:5:d:10.1007_s10614-024-10635-z
    DOI: 10.1007/s10614-024-10635-z
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    More about this item

    Keywords

    Inflation uncertainty; Interdependence; GARCH; Copulas; At-risk; Conditional forecasting; Identification through heteroskedasticity;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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