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Causality between Inflation and Inflation Uncertainty in South Africa: Evidence from a Markov-Switching Vector Autoregressive Model

Author

Listed:
  • Adnen Ben Nasr

    () (Institut Supérieur de Gestion de Tunis, Université de Tunis, Tunisia.)

  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10,Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.)

  • Ahdi N. Ajmi

    () (College of Sciences and Humanities in Slayel, Salman bin Abdulaziz University, Kingdom of Saudi Arabia.)

  • Goodness C. Aye

    () (Department of Economics, University of Pretoria)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Reneé van Eyden

    () (Department of Economics, University of Pretoria)

Abstract

This study investigates the asymmetric and time-varying causality between inflation and inflation uncertainty in South Africa within a conditional Gaussian Markov switching vector autoregressive (MS-VAR) model framework. The MS-VAR model is capable of determining both the sign and direction of causality. We account for the nonlinear, long memory and seasonal features of inflation series simultaneously by measuring inflation uncertainty as the conditional variance of inflation generated by recursive estimation of a Seasonal Fractionally Integrated Smooth Transition Autoregressive Asymmetric Power GARCH (SEA-FISTAR-APGARCH) model using monthly data for the period 1921:01 to 2012:12. The recursive, rather than a full-sample, estimation allows us to obtain a time-varying measure of uncertainty and better mimics the real-time scenario faced by economic agents and/or policy makers. The inferred probabilities from the four-state MS-VAR model show evidence of a time-varying relationship. The conditional (i.e. lead-lag) and regime-prediction Granger causality provide evidence in favour of Friedman’s hypothesis. This implies that past information on inflation can help improve the one-step-ahead prediction of inflation uncertainty but not vice versa. Our results have some important policy implications.

Suggested Citation

  • Adnen Ben Nasr & Mehmet Balcilar & Ahdi N. Ajmi & Goodness C. Aye & Rangan Gupta & Reneé van Eyden, 2014. "Causality between Inflation and Inflation Uncertainty in South Africa: Evidence from a Markov-Switching Vector Autoregressive Model," Working Papers 201453, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201453
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    Cited by:

    1. Claudiu T. Albulescu & Aviral Kumar Twari & Stephen M. Miller & Rangan Gupta, 2015. "Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data," Working Papers 201591, University of Pretoria, Department of Economics.
    2. Johannes W. Fedderke and Yang Liu, 2016. "Inflation in South Africa: An Assessment of Alternative Inflation Models," Working Papers 592, Economic Research Southern Africa.
    3. Johannes Fedderke & Yang Liu, 2016. "Working Paper – WP/16/03- Inflation in South Africa- An Assessment of Alternative Inflation Models," Working Papers 7275, South African Reserve Bank.
    4. William Barnett & Zied Ftiti & Fredj Jawadi, 2018. "The Causal Relationships between Inflation and Inflation Uncertainty," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201803, University of Kansas, Department of Economics, revised Mar 2018.
    5. repec:mbr:jmonec:v:10:y:2015:i:2:p:69-91 is not listed on IDEAS
    6. Said Zamin Shah & Said Zamin Shah & Ahmad Zubaidi Baharumshah & Muzafar Shah Habibullah & Law Siong Hook, 2017. "The Asymmetric Effects of Real and Nominal Uncertainty on Inflation and Output Growth: Empirical Evidence from Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 377-386.
    7. Alimi, R. Santos, 2017. "Association between inflation rates and inflation uncertainty in quantile regression," MPRA Paper 79683, University Library of Munich, Germany.

    More about this item

    Keywords

    Inflation; inflation uncertainty; seasonality; long memory; time-varying causality; Markov switching model;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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