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A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback

  • Stilianos Fountas

    (National University of Ireland)

  • Menelaos Karanasos

    (University of York)

  • Marika Karanassou

    ()

    (Queen Mary and Westfield College, University of London)

We examine the relationship between inflation and inflation uncertainty using a GARCH model that allows for simultaneous feedback between the conditional mean and variance of inflation. We also derive a number of theoretical econometric results and illustrate the relevance of these results with an empirical example of the US monthly inflation process. Our results show that there is strong evidence in favour of a positive bi-directional relationship between inflation and inflation uncertainty in agreement with the predictions of economic theory.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp414.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 414.

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Date of creation: May 2000
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Handle: RePEc:qmw:qmwecw:wp414
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  11. Marine Carrasco & Xiaohong Chen, 1999. "b - Mixing and Moment Properties of Various GARCH, Stochastic Volatility and ACD Models," Working Papers 99-41, Centre de Recherche en Economie et Statistique.
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  24. Cosimano, Thomas F & Jansen, Dennis W, 1988. "Estimates of the Variance of U.S. Inflation Based upon the ARCH Model: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 409-21, August.
  25. Menelaos Karanasos, . "Prediction in ARMA models with GARCH in Mean Effects," Discussion Papers 99/11, Department of Economics, University of York.
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