On inflation and inflation uncertainty in the G7 countries

The relationship between inflation and inflation uncertainty is investigated in six European Union countries for the period 1960–99. Exponential generalized autoregressive conditional heteroscedasticity models are used to generate a measure of inflation uncertainty and then Granger methods are employed to test for causality between average inflation and inflation uncertainty. In all the European countries except Germany, inflation significantly raises inflation uncertainty as predicted by Friedman. However, in all countries except the UK, inflation uncertainty does not cause negative output effects, implying that a common European monetary policy applied by the European Central Bank might lead to asymmetric real effects via the inflation uncertainty channel. Less robust evidence is found regarding the direction of the impact of a change in inflation uncertainty on inflation. In Germany and the Netherlands, increased inflation uncertainty lowers inflation, while in Italy, Spain and, to a lesser extent, France increased inflation uncertainty raises inflation. These results are generally consistent with the existing rankings of central bank independence.

A standard Generalized Autoregressive Conditional Heteroskedastic (q,v) model is employed to construct a measure of monthly inflation uncertainty in 12 emerging market economies, and the relationship between inflation and inflation uncertainty is examined using Granger‐causality tests. The results suggest that higher inflation rates increased inflation uncertainty in all the economies, providing strong support for the Friedman hypothesis. The evidence on the effect of inflation uncertainty on average monthly inflation is more mixed, with increased inflation uncertainty leading to lower average inflation in Colombia, Israel, Mexico, and Turkey, consistent with the Holland hypothesis, but to higher average inflation in Hungary, Indonesia, and Korea, consistent with the hypothesis of Cukierman and Meltzer.

This study examines the dynamic relationship between monthly inflation and inflation uncertainty in Japan, the US and the UK by employing linear and nonlinear Granger causality tests for the 1957: 01–2006: 10 period. Using a generalised autoregressive conditional heteroskedasticity (GARCH) model to generate a measure of inflation uncertainty, the empirical evidence from the linear and nonlinear Granger causality tests indicate a bidirectional causality between the series. The estimates from both the linear vector autoregressive (VAR) and nonparametric regression models show that higher inflation rates lead to greater inflation uncertainty for all countries as predicted by Friedman (1977). Although VAR estimates imply no significant impact, except for Japan, nonparametric estimates show that inflation uncertainty raises average inflation in all countries, as suggested by Cukierman and Meltzer (1986). Thus, inflation and inflation uncertainty have a positive predictive content for each other, supporting the Friedman and Cukierman-Meltzer hypotheses, respectively.

The relationship between inflation and inflation uncertainty is investigated in Nigeria from 1960m1 to 2020m5. GARCH model are used to generate a measure of inflation uncertainty and then Granger methods are employed to test for causality between average inflation and inflation uncertainty.We go further than previous studies in this country,as we (i) use a recent database,(ii) analyze the sign of causality,(iii) conduct a sub-periods analysis, and (iv) pay attention to the heteroskedasticity and some outliers by using quantile regression.We find a bi-directional causality between inflation and inflation uncertainty. More precisely,we show that a rise in the average rate of inflation leads to more uncertainty about future rate of inflation in Nigeria. Moreover, we show that inflation uncertainty leads to higher average inflation due to opportunistic central bank behavior.Finally we give strong (respectively moderate) support to the Friedman-Ball (respectively Cukierman-Meltzer) hypothesis in the Nigeria economy.

Inflation uncertainty causes macroeconomic ills and instability in the economy. This paper investigates if rising levels of inflation uncertainty serve as a source of higher inflation outcomes or vice versa, to determine if inflation uncertainty is potentially a self‐fulfilling prophecy. In addition, this paper examines the impact of inflation targeting, implemented in South Africa in February 2000, on the level of inflation and inflation uncertainty. Using a generalised autoregressive conditional heteroskedasticity (GARCH) and GARCH‐in‐mean model and monthly data spanning the period 1970:01 to 2022:05, the empirical outcomes from this study suggest the existence of a bi‐directional relationship between inflation and inflation uncertainty, with strong evidence in favour of the Friedman–Ball hypothesis and weaker evidence in support of the Cukierman–Meltzer hypothesis. This study also finds that inflation targeting has contributed significantly to reducing the level of inflation and inflation uncertainty since its adoption as policy framework. Time‐varying Granger causality tests accounting for instabilities underscore the above results, namely that inflation uncertainty led to increased inflation uncertainty in the full pre‐inflation targeting period, whereas increased uncertainty led to increased inflation only during the decade preceding inflation targeting. The results heed important policy implications, as it is imperative that inflation is kept low, stable and predictable.

This paper studies the impact of inflation on inflation uncertainty in a modelling framework where both the conditional mean and conditional variance of inflation are regime specific, and the GARCH model for inflation uncertainty is extended by including a lagged inflation term in each regime. Applying this model to the G7 countries with monthly data from 1970 till 2013, it is found that the impact of inflation on inflation uncertainty differs over the regimes in most of the G7 countries. The findings also provide strong empirical support to the well-known Friedman-Ball hypothesis of positive impact of inflation on inflation uncertainty, but only for the high-inflation regime.

Friedman's hypothesis regarding the relationship between inflation, inflation uncertainty and output growth states that full employment policy objective of the government tends to increase the rate of inflation which increases the uncertainty about the future course of inflation. Increase in inflation uncertainty lowers economic efficiency and reduces output growth. There are very few studies for underdeveloped countries particularly for India regarding the relationship between inflation, inflation uncertainty and output growth. Thornton's (2006) study regarding the relationship between inflation and inflation uncertainty in India is univariate in nature and it cannot establish the relationship between inflation uncertainty and output growth. This study intends use the bivariate GARCH model to find out the relation between inflation, inflation uncertainty and output growth simultaneously. In this study we use monthly data of wholesale price index (WPI) and index of industrial production (IIP) of India as the proxies of price and output respectively from 1950:1 to 2011:12. Following Fountas, Karanasos and Kim (2002) we have used the following bivariate GARCH model to estimate simultaneously the means, variances and covariances of inflation and output growth. We use Granger- causality test to know the statistical relationship between average inflation, output growth, inflation uncertainty and output growth uncertainty. We find strong evidence that increase in average inflation raises inflation uncertainty and increase in growth rate increases the growth rate uncertainty. But we do not find any statistically significant relationship between inflation uncertainty and output growth rate.

This study examines the causal nexus between inflation and inflation uncertainty. In this regard, conventional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models and Stochastic Volatility (SV) models are used to measure inflation uncertainty and Bai and Perron (Econometrica 66:47–78, 1998; J Appl Econom 18:1–22, 2003) test is used to identify structural breaks in inflation. The empirical evidence derived from the monthly data for the period from June 1961 to April 2011 suggests that the measure of inflation uncertainty obtained from SV model is more reliable than the measure obtained from GARCH model and also the causal nexus between inflation and inflation uncertainty seems to be significantly conditional upon the measure of uncertainty used. The structural break test identifies four episodes of inflation during the sample period, and the causality between inflation and its variability varies across different episodes. The inflation and its variance seem to be independent of each other during the first two regimes that cover the period from 1960 to 1980 and on the contrary, during the later period largely bidirectional causality is observed. Further, inflation seems to exert positive impact on inflation uncertainty, whereas inflation uncertainty has negative impact on inflation.

رابطه میان تورم و نااطمینانی آن می تواند تحت تأثیر رژیم های تورمی مختلف قرار گیرد . تحقیقات انجام شده در ایران، نقش این رژیم ها در ارتباط پویای تورم و نااطمینانی را بررسی نکرده اند. به‌منظور پرکردن این خلأ در ادبیات اقتصاد ایران، این مقاله به مطالعه رابطه میان تورم و نااطمینانی آن با وجود انتقال رژیم و با توجه به رفتار نامتقارن الگو می پردازد. برای دستیابی به این هدف از تبدیل مارکوف در چارچوب یک الگوی تعمیم یافته گارچ نامتقارن استفاده می گردد. به این منظور دو معادله به ترتیب برای تورم و نااطمینانی آن، برای دوره (2013:07-1990:03) برآورد می گردد. معادله اول تحت دو رژیم فشار تورمی فزاینده وکاهنده و معادله دوم رفتار در دو وضعیت نوسانات تورمی زیاد و کم برآورد می شود. برآوردها نشان می دهد که اثر نااطمینانی تورم بر سطح تورم در رژیم فشار تورمی فزاینده، مثبت اما در رژیم فشار تورمی کاهنده، منفی است. همچنین در وضعیت نوسانات تورمی زیاد، افزایش تورم باعث ازدیاد نااطمینانی اما در وضعیت نوسانات تورمی کم، سطح تورم بر نااطمینانی تورم تأثیری ندارد. اثرات تکانه های مثبت قیمتی بر نااطمینانی بیش تر از تکانه های منفی می باشد و احتمال ماندگاری در هر وضعیت تورمی در ایران بالا است. با توجه به نتایج، به نظر می رسد که اتخاذ سیاست های تثبیت قیمت ها نه‌تنها در کاهش تورم بلکه در کاهش نااطمینانی تورم نیز نقش مهمی دارند؛ بنابراین، پیشنهاد می گردد که دولت و به‌ویژه بانک مرکزی از اتخاذ سیاست های اقتصادی که به نااطمینانی تورم دامن می زند، اجتناب نماید. ازجمله نتایج مهم دیگر این تحقیق که باید مورد توجه مسئولین پولی قرار گیرد، اهمیت تشخیص درست و به‌موقع نوع رژیم تورمی کشور برای اتخاذ سیاست مناسب است.

The authors constructed a time series of monthly inflation uncertainty in Turkey from 1960 to 1998 using GARCH models and investigated the link between inflation and inflation uncertainty using Granger tests. The authors found strong statistical support that inflation significantly raised inflation uncertainty in Turkey over the full sample period and three subsamples. The evidence on the effect of inflation uncertainty on average inflation is mixed and depends on the time period examined. An analysis of the political conditions and the record of macroeconomic policy making in Turkey between 1960 and 1998 reveal institutional and political factors that can help explain the empirical results.

This article examines the relationship between inflation and inflationuncertainty in Iranian economy for the period 1369:1 to 1385:3 .The purpose of this study is to test the hypothesis that inflation uncertainty increases at higher levels of inflation. Analysis of this study is based on the generalized autoregressive conditional heteroscedasticity (which allow the conditional variance of the error term to be time-varying). Since this variance is a proxy for inflation uncertainty, a positive relationship between the conditional variance and inflation would be interpreted as an evidence that inflation uncertainty increases with the level of inflation. Our findings indicate that inflation causes inflation uncertainty as there is a significant positive relationship between inflation and inflation uncertainty. According to this result the role of Central Bank of Iran is so crucial in reducing inflation uncertainty by conducting proper policies.

Friedman-Ball's hypothesis draws attention to the invisible additional costs of inflation, which results from increasing inflation uncertainty. The hypothesis argues that there is a positive relationship between inflation and inflation uncertainty, and that increasing inflation brings along more inflation uncertainty due to an asymmetric information problem. In the literature, discussions about the relationship between inflation and inflation uncertainty started with Okun (1971), Gordon (1971), and continued with Friedman (1977), Ball (1992). At the present, interest in this issue has decreased significantly, due to the fact that inflation rates are at moderate levels in most countries and are even negative (deflation) in a small number of countries. In some countries including Turkey, however, the inflation problem and its resulting costs remain as current and active topics. Indeed, there exist significant literature about whether or not the Friedman-Ball hypothesis is valid for the Turkish economy. Some of the most important studies about the inflation and the resulting uncertainty in Turkey are done by Neyaptı and Kaya (2001), Berüment, et al. (2003). The motivation and the purpose of this study is updating the research on the high inflation and inflation uncertainty, the resulting costs with respect to macroeconomic variables such as investments and production, which may hinder the long-run economic growth performance in Turkey. This study examines new evidence about the validity of the Friedman-Ball hypothesis for the Turkish economy utilizing data over the period of 1985:01 – 2020:12. The results of the TGARCH and EGARCH models verify the validity of the Friedman-Ball hypothesis for Turkey and indicate that high inflation increases inflation uncertainty both in the short- and long-run. Overall, the analyses point out to the importance of striving against inflation because the problem may be more than just high inflation due to its aforementioned invisible additional costs.

We enter inflation uncertainty into error-correction models (EC) of US M1 and M2 money demand. We estimate the models using an instrumental variables procedure that is robust to mis-specification of inflation uncertainty. We find inflation uncertainty has a negative effect on M1 demand and a positive effect on M2 demand. Our results suggest that when confronted with increased inflation uncertainty, agents substitute away from M1 and to the interest bearing components of M2.

The links between inflation, inflation uncertainty and output growth: New time series evidence from Japan

This study examines the information flow between inflation and inflation uncertainty (IU) and intrastate inflationary trend among some ECOWAS member states. IU is measured using GARCH models and stochastic volatility model (SV). Transfer entropy was adopted to quantify the extent of information flow. The result showed information flow exists from inflation to the GARCH measure of IU. On the reverse flow from inflation uncertainty to inflation, there is no information flow except for Burkina Faso and Gambia which have asymmetric bidirectional flow between inflation and IU. Adopting SV measure for IU, there are no support for causality from inflation to IU for all the member states except Burkina Faso and Cabo Verde. For the reverse flow, causality exists in all the member states. On the pairwise inflation trend of member states, inflation trends are interconnected and that shocks in one country may transmit to others except for Gambia, Cote d’Ivoire and Burkina Faso. Specifically, Guinea, Liberia and Nigeria inflation shocks have the greatest effect on other WAMZ members within the study period, whereas inflation trend in Benin, Niger and Cote d’Ivoire are the most influential among WAEMU states. In conclusion, inflation - IU relationship is sensitive to how IU is measured leading to mixed findings. This study recommends the need for price stability among the ECOWAS member states. Given the interdependence among some members of each bloc of ECOWAS, policy synchronization on price stability could enhance the overall objective of single digit inflation and reduce the welfare effect of inflation uncertainty.