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Are higher levels of inflation less predictable? A state-dependent conditional heteroskedasticity approach

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  • Allan D. Brunner
  • Gregory D. Hess

Abstract

Milton Friedman (1977) proposed that there is a positive relationship between inflation and inflation uncertainty. Using state-dependent models of conditional moments, the authors find strong statistical evidence that higher levels of inflation are less predictable, although innovations in inflation are somewhat bet ter predictors of future volatility than actual inflation. The authors' results are robust to different sample periods and to assumptions about a unit root in inflation. The authors also compare their resul ts to estimates using exponential generalized autoregressive conditiona l heteroskedasticity models, an alternative to state dependent models that also allows for asymmetries but does not nest conventional models.
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Suggested Citation

  • Allan D. Brunner & Gregory D. Hess, 1990. "Are higher levels of inflation less predictable? A state-dependent conditional heteroskedasticity approach," Finance and Economics Discussion Series 141, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:141
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    1. George M. CONSTANTINIDES & Jonathan E. INGERSOLL Jr., 2005. "Optimal Bond Trading With Personal Taxes," World Scientific Book Chapters,in: Theory Of Valuation, chapter 6, pages 165-206 World Scientific Publishing Co. Pte. Ltd..
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    Keywords

    Inflation (Finance);

    Statistics

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