Inflation targeting and the inflation-inflation uncertainty relationship: evidence from Thailand

Abstract

This study extends the literature on the relationships between inflation and inflation volatility by examining the impact of inflation targeting on inflation volatility in Thailand. The ARIMA–GARCH model reveals that inflation targeting marginally reduced the degree of volatility persistence in response to inflationary shocks (i.e. inflation uncertainty). Granger-causality tests show that an increase in inflation causes an increase in inflation uncertainty. However, an increase in inflation uncertainty causes a decrease in inflation. Thus, the relationship between inflation and inflation uncertainty in Thailand support Holland's (1995) stabilization hypothesis.