Document Type

Article

Publication Date

11-2011

Subject: LCSH

Inflation (Finance)

JEL Classification

C22, E31

Disciplines

Economics

Abstract

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 bi-directional 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. JEL classification codes: C22, E31.

Comments

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Applied Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Applied Economics 14, 2, Nov. 2011] DOI:10.1016/S1514-0326(11)60015-9

DOI

10.1016/S1514-0326(11)60015-9

Publisher Citation

Cakan, Esin (with Z.A.Ozdemir and M. Balcilar). “On the nonlinear causality between inflation and its uncertainty in G-3 countries," Journal of Applied Economics, Vol. XIV, No. 2, (November 2011), 269-296.

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