Abstract
The primary purpose of this study is to model and analyze inflation volatility in ten selected Asian economies. We used quarterly data of inflation from 1987Q1 to 2008Q4 to model inflation volatility as time varying process through different symmetric and asymmetric GARCH specifications. We also proposed to model inflation volatility on the basis of cyclic component of inflation obtained from HP filter, instead of actual inflation when the latter does not fulfill the criterion of stationarity. Through news impact curves we tried to highlight the behavior of inflation volatility in response to lagged inflation shocks, under different GARCH specifications for selected economies. Bivariate granger causality test is also applied to analyze the direction of causality between inflation and different volatility estimates. We get few important results. At first, leverage parameter shows expected sign and is significant for almost all countries suggesting strong asymmetry in inflation volatility. The hyperbolic sign integral shape of news impact curves based on GJR-GARCH is not only consistent with the results of our previous study based on Pakistani data (Rizvi and Naqvi, 2008) but also highlight the importance of inflation stabilization programs particularly because of the subsequent evidences obtained in favor of bidirectional causality running between inflation and inflation volatility. We also found that cyclic component of inflation could be a suitable proxy of inflation for volatility estimation.
Highlights
Inflation is undoubtedly one of the most largely observed and tested economic variables both theoretically and empirically
The hyperbolic sign integral shape of news impact curves (NICs) based on GJR-generalized autoregressive conditional heteroskedasticity (GARCH) is consistent with the results of our previous study based on Pakistani data (Rizvi & Naqvi, 2010) and highlights the importance of inflation stabilisation programmes because of the subsequent evidence obtained in favour of bidirectional causality running between inflation and inflation volatility
Overall results are cumbersome but if we focus on asymmetric models (EGARCH and GJR-GARCH), both strongly favour the presence of Friedman-ball hypothesis and reject the presence of Cuckierman-meltzer hypothesis for Indonesia, Malaysia, Pakistan and Phillipines
Summary
Inflation is undoubtedly one of the most largely observed and tested economic variables both theoretically and empirically. There could be arguments for having, or not, moderate inflation in the economy and its pros and cons, if the debate focuses on inflation uncertainty or inflation volatility instead of inflation level, economists have almost consensus about its negative impact over some of the most important economic variables, like output and growth rate via different channels.. The primary purpose of this article is to investigate and analyse the behaviour of inflation volatility in different Asian economies. There is a consensus about the negative consequences of inflation volatility on different financial and economic variables which eventually deteriorate the economic growth and welfare. Abundant literature is available on different channels through which inflation volatility distorts decision-making regarding future savings and investments, the efficiency of resource allocation and the level of real output. Abundant literature is available on different channels through which inflation volatility distorts decision-making regarding future savings and investments, the efficiency of resource allocation and the level of real output. (Fischer, 1981; Golob, 1993; Holland, 1993)
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