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Stochastic Money Demand and the Inflation-Uncertainty Relationship

Dennis Powers

The Manchester School of Economic & Social Studies, 1997, vol. 65, issue 0, 59-68

Abstract: It has long been asserted that there exists a correlation between expected inflation and inflation uncertainty. While the empirical evidence seems to support this hypothesis, there have been relatively few formal explanations offered for this phenomenon. The author argues there is a very simple reason for the observed correlation between expected inflation and inflation uncertainty. If real money demand is stochastic, inflation must also be stochastic. Any increase in the growth rate of money merely rescales the distribution of inflation causing an increase in the conditional standard deviation of inflation. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1997
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