ABSTRACT This study investigates the impact of inflation uncertainty on corporate financing decisions during the unprecedented post-2021 European inflation surge. Using a panel dataset of 892 non-financial firms across 19 developed European countries from 2007 to 2023, we use the GARCH (1,1) model to measure inflation uncertainty. Applying fixed-effects and system GMM estimators, our empirical analysis reveals a robust negative relationship between inflation uncertainty and corporate leverage. We identify specific economic channels that drive this deleveraging behaviour. First, higher inflation uncertainty worsens information asymmetry, leading creditors to demand higher risk premiums or limit credit, consistent with agency theory. Second, short-term debt is significantly more sensitive to inflation risks than long-term debt, supporting a supply-side constraint channel where creditors shorten maturity to mitigate agency risks. Third, our dynamic analysis suggests that the costs of financial distress outweigh the transaction costs of rebalancing; therefore, firms tend to rapidly adjust their leverages to the optimal capital structure. Finally, we show that robust market institutions significantly mitigate adverse financing constraints related to inflation risks. Our findings indicate that inflation uncertainty is a significant determinant of corporate financial policy through distress avoidance and credit supply channels.

ABSTRACT This study examines the impact of inflation uncertainty on bank stability in the context of macroprudential regulations being increasingly adopted across countries. Utilizing a dataset of over 1600 banks in 33 emerging economies from 2000 to 2018, we find a negative relationship between inflation uncertainty and bank stability, indicating that higher inflation uncertainty significantly increases bank risk. However, our analysis reveals that tightened macroprudential regulations can effectively counteract this adverse influence, enhancing bank stability during periods of inflation uncertainty. These findings are consistent across a series of robustness tests, including alternative variable measurements, sensitivity analyses, and econometric approaches. Moreover, our results highlight the differential effectiveness of various macroprudential instruments. Specifically, regulations involving reserve requirements, asset‐based instruments, and capital buffers demonstrate more pronounced effects in mitigating the impact of inflation uncertainty on bank stability.

This study examines the relationship between inflation and inflation uncertainty in Pakistan using monthly CPI data from 1990 to 2022. Employing GARCH and EGARCH models, we find robust evidence supporting Friedman's hypothesis that higher inflation increases uncertainty, with significant volatility persistence (α+β = 0.944). The EGARCH results reveal asymmetric effects, showing positive inflation shocks amplify uncertainty more than adverse shocks (γ = 0.158). Granger causality tests confirm bidirectional feedback, with stronger causality from inflation to uncertainty (F = 5.327) than vice versa ( ). Subsample analysis indicates increased volatility persistence post-2015 central bank reforms ( ) Rural-rural comparisons demonstrate higher baseline uncertainty in rural areas (hₜ = 1.026 vs. 0.842) but stronger asymmetric responses in urban centres. The findings highlight the complex interplay between price stability and economic uncertainty in developing economies, emphasizing how institutional frameworks and regional disparities shape inflation dynamics. Policy implications suggest the need for strengthened central bank communication, regionally differentiated approaches to inflation control, and enhanced monitoring of uncertainty indicators. This research adds to existing knowledge because it provides more detailed empirical evidence on the inflation-uncertainty nexus in Pakistan and contributes methodological insights that will also apply to other emerging economies with similar macroeconomic challenges. This finding demonstrates the need for coherence of monetary and structural policies to disentangle the cyclical relationship between inflation and uncertainty in developing economies.

This study examines the effectiveness of Bayesian Vector Autoregressive (BVAR) models in forecasting consumer price inflation in Azerbaijan. Given the country's limited and often low-frequency macroeconomic datasets, traditional forecasting models frequently yield poor forecasting accuracy. To address this, we construct BVAR models using three alternative priors, namely Minnesota, Normal-Wishart, and Sims-Zha Normal-Wishart (dummy observations) and compare their forecasting accuracy with benchmark models: a univariate random walk and a standard unrestricted Vector Autoregressive (VAR) model. Using quarterly data from 2003Q1 to 2024Q2, the study divides the sample into estimation and pseudo-out-of-sample forecasting periods. We evaluate forecast accuracy using relative root mean squared forecasting errors (RMSFEs), while the Diebold-Mariano (DM) test is employed to assess the statistical significance of forecast differences. The models incorporate key domestic and external drivers of inflation, including the M2 money supply, manufacturing producer prices, real non-oil GDP, nominal effective exchange rates, and foreign inflation. The results show that all BVAR models outperform the random walk model across nearly all forecast horizons, while the BVAR with dummy observations prior consistently yields the lowest RMSFEs. Although Minnesota has underperformed in short-term forecasts, it improves in accuracy over longer horizons. Compared to the VAR benchmark, the Sims-Zha Normal-Wishart prior demonstrates clear superiority, confirmed by statistically significant DM test results. The study contributes to the literature on macroeconomic forecasting in developing economies and provides practical implications for policymakers. Future research may focus on extending the framework to incorporate time-varying parameters, high-frequency indicators, or density forecasts for inflation uncertainty.

Abstract This paper examines the relationship between inflation expectations and inflation persistence. Using a Markov‐switching model of U.S. inflation, we first show that higher inflation persistence is associated with a higher mean level of inflation and greater inflation uncertainty. Moreover, we obtain evidence that an increase in inflation expectations predicts the greater likelihood of being in a regime with highly persistent inflation. Thus, inflation expectations serve as an early warning indicator of the risk of persistently high inflation.

ABSTRACTWhat are the economic implications of financial and uncertainty shocks? Financial shocks reduce both output and goods prices, while uncertainty shocks reduce output but raise goods prices. In response to uncertainty shocks, firms increase markups, in line with the theory of self‐insurance against being stuck with too low a price. This explains why goods prices may increase at the onset of a recession and why recessions feature less pronounced deflationary pressures. Both shocks are jointly identified exclusively using restrictions on their contribution to the forecast error of a selected variable at the dates of well‐understood economic events. The restricted shock must be the largest contributor to the forecast error, but only among shocks that move the forecast error in the same direction.

Abstract Inflation uncertainty is an undeniable factor in economic decision-making. In this study, we investigate predictive factors that possess information on inflation uncertainty among many observable macroeconomic variables and uncertainty indices. To do this, we estimate several inflation prediction models popular in the literature, allowing for stochastic volatility with predetermined variables. We apply the Dirac spike-and-slab prior to the volatility-explaining variables to detect relevant macroeconomic determinants of the inflation volatility process. Contrary to prior studies suggesting that the inflation level is essentially a unique factor explaining inflation uncertainty, our findings reveal that survey inflation expectations and the capacity utilization rate are significantly more relevant. These results remain robust to different models of inflation.

It is well known that banks’ deposit accounts allow holders to withdraw or deposit funds freely, restricting banks’ ability to adjust their leverage ratios autonomously. Consequently, for undercapitalized banks lacking sufficient equity buffers to absorb risks, the uncertainty surrounding deposit inflows and future leverage can diminish bank value. Furthermore, inflation risk affects the real value of bank funds. This paper examines the valuation of bank deposits and the optimal capital structure under inflation uncertainty. First, we derive the stochastic process for the real value of bank shareholders’ equity by using stochastic analysis. Next, we derive the Hamilton-Jacobi-Bellman (HJB) equation of banks’ value function via dynamic programming principles and conduct numerical simulations. Additionally, from an economic perspective, we analyze how inflation risk, leverage constraints, deposit volatility, and the risk-free interest rate influence deposit valuation and capital structure decisions in banking.

Abstract Inflation uncertainty is a critical factor influencing not only the market mechanisms but also the economic activity efficiency. In this paper, we investigated the relationship between inflation and growth to capture the impact of inflation uncertainty in Tunisia. The study relied on a dataset covering the period 1984.01-2018.08 and was characterized by a nonlinear specification. We used Hansen’s (2001) Threshold Regression (TR) analysis to determine one threshold effect of inflation on growth while explaining the role of inflation uncertainty in the whole process. This study concluded that an optimal inflation rate does exist. Under this rate, a little rise in inflation may enhance economic growth, allowing an adverse impact of inflation uncertainty. Above the critical threshold of 3%, it was revealed that inflation and inflation uncertainty play opposite roles: while the former harms growth, the latter benefits it. Thus, we cannot sustain the Friedman-Ball hypothesis for the two regimes. To the best of the authors’ knowledge, this is the first study that aimed to investigate the simultaneous effects of inflation and inflation uncertainty on growth in Tunisia using a non-linear methodology. This study aims to fulfil the knowledge gap of such studies for developing countries.

The aim of this study is to analyze the relationship between inflation and inflation uncertainty in Serbia. Using the GARCH model, inflation uncertainty was assessed with the EGARH model proving to be the best model. The results of the Granger causality test between inflation and inflation uncertainty showed that inflation affects the growth of inflation uncertainty in the case of Serbia and that the growth of inflation leads to the growth of uncertainty, thus confirming the Friedman-Ball hypothesis. On the other hand, the results showed that inflation uncertainty affects the growth of inflation and that the growth of inflation uncertainty affects the growth of inflation in the case of Serbia which is in accordance with Cukierman and Meltzer's hypothesis.

Recently, the inflationary impacts of climate change shocks have emerged among key constraints to price and financial stability. In line with this development, some Central banks are incorporating climate change risks in their surveillance activities. Thus, this study examines the asymmetric inflationary impact of climate change shocks on food and general consumer prices in Algeria, Egypt, Nigeria, and South Africa. The study employs a panel quantile via the moment's method and a wavelet coherency analysis for monthly from 2000M01 to 2023M12. The empirical results reveal that, first, there is a dynamic interconnectedness between climate change shocks and inflation. Secondly, the results show that climate change shocks have an inflationary impact on food and general consumer prices. However, the magnitude and direction of the impact depend on the prevailing inflationary regime. Finally, the analysis shows that climate change shocks raise inflation uncertainty. Collectively, these findings imply that climate change shocks are key sources of inflationary pressures and uncertainty, posing significant challenges to central banks' inflation management. One implication of these findings is that central banks in these countries will likely face extreme difficulty stabilising inflation since monetary policy instruments are mainly demand management, and thus may be ineffective in dealing with climate change shocks. In line with the findings, the study recommends that these countries should enhance their inflation surveillance and monetary policy strategies but considering the potential climate change risks.

Abstract This study proposes an implicit index for central bank credibility, which is critical in developing countries implementing an inflation-targeting regime. In a credible central bank, the policy rate impacts the interest rate on short-term deposits. Under this assumption, the residuals obtained from the panel regression model, in which deposit rates are defined as dependent and policy rates as independent variables, are used to calculate the implicit credibility index of central banks. The proposed central bank implicit credibility index was calculated using monthly data from 12 developing countries and New Zealand implementing the inflation targeting regime between January 2006 and June 2023. According to average implicit credibility scores, the most credible central banks for the period between 2006 and 2023 are Thailand, South Africa, and New Zealand, respectively. The results of the fixed effects model using the annual data of the 13 countries between 2006 and 2022 indicate that inflation and its uncertainties have negative effects on the implicit credibility index of the central bank. These results indicate that central banks in developing countries with high inflation and inflation uncertainty may have difficulty in ensuring credibility.

This study examines the dynamic relationship between inflation, inflation uncertainty, and economic performance in Mexico using the Generalized Autoregressive Conditional Heteroskedasticity-in-Mean (GARCH-M) and bivariate GARCH-in-mean (BGARCH-M) models. Based on monthly data from 1995 to 2019, the analysis estimates nominal uncertainty and evaluates its macroeconomic implications under Mexico’s inflation-targeting regime. The results indicate a significant and positive link between past inflation and future uncertainty, underscoring the importance of maintaining low and stable inflation to contain volatility. Furthermore, inflation uncertainty is found to exert a negative influence on economic performance, particularly in terms of output variability. However, the study does not find conclusive evidence that inflation uncertainty declined following the formal adoption of inflation targeting. These findings suggest that, while Mexico has achieved price stability, inflation uncertainty remains sensitive to external shocks and policy credibility. The study contributes to the broader literature by reassessing the effectiveness of inflation targeting in an increasingly globalized and volatile environment, offering important lessons for emerging economies managing external vulnerabilities and institutional constraints.

This paper investigates the impact of inflation and inflation uncertainty on stock returns in Turkey from 2006:01 to 2024:04. The study period was selected to reflect key structural changes in the Turkish economy, including the adoption of explicit inflation targeting and the process of financial deepening. Stock returns in Turkey are represented by the returns of the BIST100 index, which tracks the performance of the top 100 companies with the highest trading volume and market capitalisation. To capture the effects of inflation uncertainty, ARCH/GARCH models are employed. The Johansen cointegration analysis is used to estimate the long-term relations among the variables, while FMOLS, DOLS, and CCR methods are applied to estimate long-run coefficients. The findings point out that both inflation and inflation uncertainty positively influence stock returns in Turkey. In particular, a rise in inflation uncertainty has a stronger impact on boosting stock returns than a rise in inflation itself. These results suggest that stocks serve as a safe investment option in inflationary environments.

Whether the adoption of an inflation targeting (IT) regime reduces exchange rate volatility has been a heated debate and a subject of intense research. On the one hand, exchange rate volatility can be addressed by managing the inflation rate. On the other hand, exchange rate volatility cannot be manipulated by interest rates as the main instrument in the inflation targeting regime. This article aims at examining the impact of inflation targeting regime on exchange rate volatility. Taking the case of Indonesia over the period 2000(1)–2022(12), we found that the targeted inflation lowers inflation rate instability. However, our two-stage generalised autoregressive heteroskedasticity conditional model estimation concludes that inflation volatility induces exchange rate volatility. Accordingly, announcing higher inflation targets may not be costly to reduce inflation uncertainty, resulting in a decline in exchange rate volatility. Furthermore, market intervention can symmetrically mitigate exchange rate volatility. Accordingly, market intervention is needed as an additional instrument for macroeconomic stabilisation. In other words, the optimal stock of foreign reserves (FR) management might avoid Indonesia’s monetary authority to impose dual goals of inflation and exchange rate stability. JEL: E31, E58, F31, F41

The six measures we select to examine the costs of rising uncertainty illustrate types of uncertainty that have been particularly prominent since 2019. As listed in the first column of table 1, the first two measures capture uncertainty about the underlying behavior of the economy (Real Economic Uncertainty, REU, in Jurado, Ludvigson, and Ng, 2015, and Inflation Uncertainty in Londono, Ma, and Wilson, 2023). REU and Inflation Uncertainty are measures of the unpredictability of the macroeconomy and were particularly elevated during and in the aftermath of the COVID shock. The second two series measure uncertainty regarding policy outcomes, a type of uncertainty that is particularly salient currently (Economic Policy Uncertainty, EPU, in Baker, Bloom, and Davis, 2016, and Trade Policy Uncertainty, TPU, in Caldara et al., 2020). The next measure captures geopolitical risks (GPR) such the Russian invasion of Ukraine or the earlier 9/11 attacks (Caldara and Iacoviello, 2022). The final measure is financial uncertainty, often proxied by the VIX, which was quite high at the start of COVID and rose during the 2023 banking stresses.3

The author uses Canadian public-sector union contracts from a 30-year period to study the factors influencing wage setting. He also undertakes complementary analyses of contract duration and the use of Cost-of-Living Adjustment (COLA) clauses to examine how variables capturing uncertainty and contracting costs affect contract length and the use of indexing provisions. Findings show that inflation expectations, unemployment rates, wage growth, and COLA clauses are associated with fairly large effects on wage settlements that are much more prominent during the period prior to the Bank of Canada adopting an inflation target (i.e., before 1991). They also indicate that variables capturing inflation uncertainty and contracting costs do not have a large effect on contract duration, but contracting costs do have a larger effect on the use of indexing provisions. Results suggest that indexing provisions are an important inflation coping mechanism for both wage settlements and contract duration, with bargaining pairs willing to trade off smaller base wage changes and longer contracts for them.

We examine the nonlinear effects of climate policy uncertainty (CPU) on California carbon allowance prices (CCA) and S&P 500 ESG stock prices (SPESG). We used the nonlinear ARDL method on monthly data from December 2013 to August 2022. Using inflation uncertainty and WTI oil prices as control variables, we found that increases in CPU positively affect carbon allowance and ESG stock prices in the short and long term.

ABSTRACT The purpose of this study is to examine the inflation and inflation uncertainty nexus for nine emerging and three developed market economies using more realistic and flexible inflation uncertainty measures based on seven different stochastic volatility (SV) models. In that regard, we first utilize a log predictive score to determine the most appropriate SV model for each economy examined, and then analyse the causality relationship between inflation and inflation uncertainty. Contrary to general findings in the related literature, the results provide strong and robust evidence that inflation uncertainty has a positive and statistically significant impact on the inflation rates for both the emerging and developed countries examined.

The study examines whether instability in macroeconomic factors, such as economic growth, inflation, and money supply, causes Vietnamese commercial banks to be unstable. The OLS regression method only gives a result showing the positive or negative impact of the independent variable on the dependent variable. However, with quantile regression, the bank stability level is divided into many small quantiles, and for each quantile, there is a regression function. The quantile regression results show that GDP growth uncertainty negatively affects banking stability at low quantiles of bank stability; however, in the high quantiles, GDP growth uncertainty has an insignificant impact on bank stability. The results imply that the more volatile the economic growth is, the more unstable the bank will be if banks have low stabilization. However, if banks have high stability, economic growth uncertainty does not affect banking stability. The results of money supply M2 uncertainty impact on bank stability are similar to GDP growth uncertainty. Moreover, high inflation uncertainty reduces bank stability in most of the quantiles of the bank stability.