How to measure inFLAtion volatility. A note

Alfredo Garcia-Hiernaux, Maria T. Gonzalez-Perez and David Guerrero (davidesg@ucm.es)

No 2314, Working Papers from Banco de España

Abstract: This paper proposes a statistical model and a conceptual framework to estimate inflation volatility assuming rational inattention, where the decay in the level of attention reflects the arrival of news in the market. We estimate trend inflation and the conditional inflation volatility for Germany, Spain, the euro area and the United States using monthly data from January 2002 to March 2022 and test whether inflation was equal to or below 2% in this period in these regions. We decompose inflation volatility into positive and negative surprise components and characterise different inflation volatility scenarios during the Great Financial Crisis, the Sovereign Debt Crisis, and the post-COVID period. Our volatility measure outperforms the GARCH(1,1) model and the rolling standard deviation in one-step ahead volatility forecasts both in-sample and out-of-sample. The methodology proposed in this article is appropriate for estimating the conditional volatility of macro-financial variables. We recommend the inclusion of this measure in inflation dynamics monitoring and forecasting exercises.

Keywords: inflation; inflation trend; inflation volatility; rational inattention; positive and negative surprises. (search for similar items in EconPapers)
JEL-codes: C22 C32 E3 E4 E5 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2023-06
New Economics Papers: this item is included in nep-ecm, nep-eec, nep-inv, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2314

DOI: 10.53479/30092

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