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Inflation and Uncertainty: Evidence from GARCH-MIDAS-in-Mean Modelling

Author

Listed:
  • Chaoyi Chen

    (Magyar Nemzeti Bank, Budapest Metropolitan University)

  • Tamas Barko

    (Quoniam Asset Management GmbH, Budapest Metropolitan University)

  • Oliver Nagy

    (Eotvos Lorand University)

Abstract

We revisit the relationship between inflation and inflation uncertainty using a novel GARCH-MIDAS-in-Mean approach, which allows for the decomposition of inflation uncertainty into short-term and time-varying long-term components. We test our model on UK data. Our findings indicate that macroeconomic and financial variables significantly influence the long-term component of inflation uncertainty. By enabling long-term uncertainty to vary over time through MIDAS filtering, we show that the evidence for past inflation raising short-run uncertainty weakens compared to results that assume a constant long-term inflation uncertainty component. However, our results support the Cukierman-Meltzer hypothesis, indicating that the impact of inflation uncertainty on inflation becomes more robust and pronounced when longer samples are used, although this effect is sensitive to structural breaks, such as the VAT cut and the Covid-19 pandemic. Additionally, we find no evidence that changes in inflation feed back into short-run uncertainty.

Suggested Citation

  • Chaoyi Chen & Tamas Barko & Oliver Nagy, 2025. "Inflation and Uncertainty: Evidence from GARCH-MIDAS-in-Mean Modelling," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 24(3), pages 52-72.
    • Handle: RePEc:mnb:finrev:v:24:y:2025:i:3:p:52-72
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    References listed on IDEAS

    as
    1. Robert F. Engle & Eric Ghysels & Bumjean Sohn, 2013. "Stock Market Volatility and Macroeconomic Fundamentals," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 776-797, July.
    2. Daal, Elton & Naka, Atsuyuki & Sanchez, Benito, 2005. "Re-examining inflation and inflation uncertainty in developed and emerging countries," Economics Letters, Elsevier, vol. 89(2), pages 180-186, November.
    3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    4. Reiner Martin & Piroska Nagy Mohacsi, 2024. "Fighting Inflation within the Monetary Union and Outside: The Case of the Visegrad 4," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 23(4), pages 102-119.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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