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Nonlinear relationship between inflation and inflation uncertainty in Taiwan

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  • Shyh-Wei Chen
  • Chung-Hua Shen
  • Zixiong Xie

Abstract

Using Taiwan data, the study employs Hamilton's (2001) flexible regression model to investigate the relationship between inflation and inflation uncertainty. The results convincingly support Friedman's hypothesis that a rise in the inflation rate increases inflation uncertainty. This result, however, holds only in a positive inflation regime. When the inflation rate is in a negative inflation regime, one clearly notes that a drop in the inflation rate also increases inflation uncertainty. Thus Friedman's argument is complemented by advocating that a rise in the absolute inflation rate increases inflation uncertainty. Turning to Cukierman-Meltzer's hypothesis, both linear and nonlinear inflation uncertainties affect the inflation rate, where the former has positive but the latter has negative effects.

Suggested Citation

  • Shyh-Wei Chen & Chung-Hua Shen & Zixiong Xie, 2006. "Nonlinear relationship between inflation and inflation uncertainty in Taiwan," Applied Economics Letters, Taylor & Francis Journals, vol. 13(8), pages 529-533.
  • Handle: RePEc:taf:apeclt:v:13:y:2006:i:8:p:529-533 DOI: 10.1080/13504850500400405
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    References listed on IDEAS

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