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Time Variation Or Asymmetry? The Inflation And Inflation Uncertainty Nexus: A Case Of China

Author

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  • XUE GAO

    (College of Economics and Management Shandong, University of Science and Technology 579, Qianwan Gang Rd., Qingdao, P. R. China†College of International Business, Qingdao Huanghai University, 1145 Linghai Road, West Coast New Area, Qingdao, P. R. China)

  • YIXIN REN

    (College of Economics and Management Shandong, University of Science and Technology 579, Qianwan Gang Rd., Qingdao, P. R. China)

  • XIN LI

    (Antai College of Economics & Management, Shanghai Jiao Tong University 1954, Huashan Rd., Shanghai, P. R. China)

Abstract

This investigation tests the dynamic and quantile causality between inflation and inflation uncertainty of China with constructing a rolling-window based quantile causality test. The result shows unidirectional causality from inflation to inflation uncertainty, which is significantly asymmetric and time-varying. Inflation more likely causes inflation uncertainty in higher quantiles, indicating the linear model based on conditional mean may overestimate this impact in a lower quantile interval. Furthermore, the influence also exhibits a consistent time-varying property that cannot be explained simply by the conditional distribution. The causality shows more significance since 2007 when China cancelled the mandatory settlement system, which led to the increase of monetary policy independence. The time-varying nature indicates institutional changes may lead to regime switching of this causality. Our result supports the Friedman–Ball hypothesis [Friedman, M (1977). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85(3), 451–472; Ball, L (1992). Why does high inflation raise inflation uncertainty? Journal of Monetary Economic, 29(3), 371–388] to a certain extent and implies that the purpose of controlling inflation uncertainty of China can be achieved by controlling inflation if and only if it is relatively high on the premise of the independence of monetary policy.

Suggested Citation

  • Xue Gao & Yixin Ren & Xin Li, 2021. "Time Variation Or Asymmetry? The Inflation And Inflation Uncertainty Nexus: A Case Of China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 66(03), pages 881-903, June.
    • Handle: RePEc:wsi:serxxx:v:66:y:2021:i:03:n:s0217590819500760
    DOI: 10.1142/S0217590819500760
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