The Dynamics Between Inflation and Inflation Uncertainty: Evidence from India

B. Balaji (), S. Raja Sethu Durai () and M Ramachandran ()
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B. Balaji: Pondicherry University
S. Raja Sethu Durai: Pondicherry University

Journal of Quantitative Economics, 2016, vol. 14, issue 1, No 1, 14 pages

Abstract: Abstract 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.

Keywords: Inflation; Inflation uncertainty; GARCH models; Stochastic Volatility models; Multiple structural breaks (search for similar items in EconPapers)
JEL-codes: C15 C22 E31 E32 J21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s40953-015-0027-y

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