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Enflasyon ve enflasyon belirsizliği ilişkisi için G7 ekonomileri üzerine bir inceleme
[An investigation for the inflation and inflation uncertainty relationship upon the G7 economies]

  • Levent, Korap

The relationships between inflation and its uncertainty have long been perceived in the economics literature as a special research area based mainly on empirical findings. Testing the causality between these aggregates enables us to attain the significant knowledgement of whether or not inflation and its associated volatility tend to have potential negative effects on the growth process of the economy. Based on a contemporaneous literature, in this paper, some main approaches dealing with the causality issues between inflation and inflation uncertainty have been documented, and then, the empirical validity of these competing approaches has been tested for the G7 countries with monthly frequency observations in the 1973M01 - 2008M09 period. To test the causal relationships between inflation and inflation uncertainty, a proxy variable for inflation uncertainty represented by conditional volatility of inflation is first generated by using contemporaneous generalized autoregressive conditional heteroskedasticity (EGARCH) methods. The use of a GARCH-type model enables us to estimate time-varying measures of inflation uncertainty, and this will be appropriate for an empirical attempt aiming at directly testing the implications of the hypotheses examined in this paper. Following the construction of uncertainty component of inflation, some conventional bivariate Granger-causality tests have been tried to be conducted to examine the causality between inflation and inflation uncertainty. Estimation results reveal that in a way supporting the arguments put forward by Friedman-Ball hypotheses, inflation is the Granger-cause of the inflation uncertainty considering a positive relationship. However, no clear-cut evidence for the positive causality running from inflationary uncertainty to inflation explained mainly by Cukierman-Meltzer hypotheses can be found for all the G7 countries in the sense that such an inference seems to be supported in some countries, the sign of this relationship varies in some others, and no causalityhas been found in still others. All in all, we infer that inflation is a cause of an associated uncertainty component related to itself occured in the economy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19478.

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Date of creation: 2009
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Publication status: Published in Gaziantep Üniversitesi Sosyal Bilimler Dergisi 2.8(2009): pp. 503-523
Handle: RePEc:pra:mprapa:19478
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  1. Devereux, Michael, 1989. "A Positive Theory of Inflation and Inflation Variance," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 105-16, January.
  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. Hwang, Y., 2001. "Relationship between inflation rate and inflation uncertainty," Economics Letters, Elsevier, vol. 73(2), pages 179-186, November.
  4. Kontonikas, A., 2004. "Inflation and inflation uncertainty in the United Kingdom, evidence from GARCH modelling," Economic Modelling, Elsevier, vol. 21(3), pages 525-543, May.
  5. Laurence Ball & Stephen G. Cecchetti, 1990. "Inflation and Uncertainty at Long and Short Horizons," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 215-254.
  6. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
  7. Laurence Ball, 1990. "Why Does High Inflation Raise Inflation Uncertainty?," NBER Working Papers 3224, National Bureau of Economic Research, Inc.
  8. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  9. Sandy Suardi & O.T.Henry & N. Olekalns, . "Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty: Evidence from the G7 Economies," MRG Discussion Paper Series 0306, School of Economics, University of Queensland, Australia.
  10. Holland, A Steven, 1995. "Inflation and Uncertainty: Tests for Temporal Ordering," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 827-37, August.
  11. Caporale, Tony & McKiernan, Barbara, 1997. "High and variable inflation: Further evidence on the Friedman hypothesis," Economics Letters, Elsevier, vol. 54(1), pages 65-68, January.
  12. 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.
  13. Kevin B. Grier & Mark J. Perry, 2000. "The effects of real and nominal uncertainty on inflation and output growth: some garch-m evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 45-58.
  14. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  15. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  16. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
  17. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  18. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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