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The link between inflation and inflation uncertainty: Evidence from G7 countries

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  • Ramaprasad Bhar

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  • Shigeyuki Hamori

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Abstract

In this paper we adopt the Markov-switching heteroscedasticity model to analyse the inflation series for G7 countries and examine the interaction between inflation rate and its uncertainty over both the short- and long-run. It is found that the relationship between inflation and inflation uncertainty depends on whether the shock is permanent or transitory. The relationship also differs from country to country. High uncertainty about long-run inflation is associated with a significant positive shift in inflation for Canada, Germany, and Japan. High uncertainty about short-run inflation is associated with a significant positive shift in inflation for Germany and USA, and a significant negative shift in inflation for Canada. The modelling approach employed in this paper is empirically supported by various diagnostics including the Vuong test. We also derive the two components of the variance of inflation forecast for a particular forecast horizon. It is found that the inflation uncertainty increases at all horizons in the middle of 1970s and return to the low level in the middle of 1980s. Copyright Springer-Verlag 2004

Suggested Citation

  • Ramaprasad Bhar & Shigeyuki Hamori, 2004. "The link between inflation and inflation uncertainty: Evidence from G7 countries," Empirical Economics, Springer, vol. 29(4), pages 825-853, December.
  • Handle: RePEc:spr:empeco:v:29:y:2004:i:4:p:825-853 DOI: 10.1007/s00181-004-0220-x
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2012. "Uncertainty of inflation and inflation rate: Does credibility of inflation policy matter?," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 95-110, September.
    2. Neil Dias Karunaratne & Ramprasad Bhar, 2010. "Regime-Shifts & Post-Float Inflation Dynamics In Australia," Discussion Papers Series 405, School of Economics, University of Queensland, Australia.
    3. Ramprasad Bhar & Girijasankar Mallik, 2013. "Inflation uncertainty, growth uncertainty, oil prices, and output growth in the UK," Empirical Economics, Springer, pages 1333-1350.
    4. WenShwo Fang & Stephen Miller & Chih-Chuan Yeh, 2010. "Does a threshold inflation rate exist? Quantile inferences for inflation and its variability," Empirical Economics, Springer, pages 619-641.
    5. Bouoiyour, Jamal & Selmi, Refk, 2013. "Nonlinearities and the nexus between inflation and inflation uncertainty in Egypt: New evidence from wavelets transform framework," MPRA Paper 52414, University Library of Munich, Germany.
    6. Libo Yin, 2016. "Does oil price respond to macroeconomic uncertainty? New evidence," Empirical Economics, Springer, pages 921-938.
    7. Peter H. Egger & Kevin E. Staub, 2016. "GLM estimation of trade gravity models with fixed effects," Empirical Economics, Springer, pages 137-175.
    8. Kuang-Liang Chang & Chi-Wei He, 2010. "Does The Magnitude Of The Effect Of Inflation Uncertainty On Output Growth Depend On The Level Of Inflation?," Manchester School, University of Manchester, vol. 78(2), pages 126-148, March.
    9. Steffen Henzel & Elisabeth Wieland, 2013. "Synchronization and Changes in International Inflation Uncertainty," CESifo Working Paper Series 4194, CESifo Group Munich.
    10. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú.
    11. Karunaratne, Neil Dias & Bhar, Ramprasad, 2011. "Regime-shifts and post-float inflation dynamics of Australia," Economic Modelling, Elsevier, vol. 28(4), pages 1941-1949, July.
    12. Muhammad Azam & Muhammad Khan & Nasir Iqbal, 2012. "Impact of Political Risk and Uncertainty on FDI in South Asia," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), pages 59-77.
    13. Christian Grimme & Steffen Henzel & Elisabeth Wieland, 2014. "Inflation uncertainty revisited: a proposal for robust measurement," Empirical Economics, Springer, pages 1497-1523.
    14. Buth, Bora & Kakinaka, Makoto & Miyamoto, Hiroaki, 2015. "Inflation and inflation uncertainty: The case of Cambodia, Lao PDR, and Vietnam," Journal of Asian Economics, Elsevier, vol. 38(C), pages 31-43.
    15. Ahmad Zubaidi Baharumshah & Siew-Voon Soon, 2014. "Inflation, inflation uncertainty and output growth: what does the data say for Malaysia?," Journal of Economic Studies, Emerald Group Publishing, vol. 41(3), pages 370-386, May.
    16. Kushal Banik Chowdhury & Nityananda Sarkar, 2015. "The Effect of Inflation on Inflation Uncertainty in the G7 Countries: A Double Threshold GARCH Model," International Econometric Review (IER), Econometric Research Association, vol. 7(1), pages 34-50, April.
    17. Donal Bredin & Stilianos Fountas, 2007. "Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries," Money Macro and Finance (MMF) Research Group Conference 2006 125, Money Macro and Finance Research Group.

    More about this item

    Keywords

    Markov-switching heteroscedasticity model; inflation; inflation uncertainty; C5; E3;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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