Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model
Adnen Ben Nasr (),
Mehmet Balcilar,
Ahdi Noomen Ajmi,
Goodness C. Aye,
Rangan Gupta and
Renee van Eyden ()
Emerging Markets Review, 2015, vol. 24, issue C, 46-68
Abstract:
This study investigates the asymmetric and time-varying causalities between inflation and inflation uncertainty in South Africa within a conditional Gaussian Markov switching vector autoregressive (MS-VAR) model framework. The MS-VAR model is capable of determining both the sign and direction of causality. We account for the nonlinear, long memory and seasonal features of the inflation series simultaneously by measuring inflation uncertainty as the conditional variance of inflation generated by recursive estimation of a Seasonal Fractionally Integrated Smooth Transition Autoregressive Asymmetric Power GARCH (SEA-FISTAR-APGARCH) model using monthly data for the period 1921:01 to 2012:12. The recursive, rather than full-sample, estimation allows us to obtain a time-varying measure of uncertainty and better mimics the real-time scenario faced by economic agents and/or policy makers. The inferred probabilities from the four-state MS-VAR model show evidence of a time-varying relationship. The conditional (i.e. lead–lag) and regime-prediction Granger causality provide evidence in favor of Friedman's hypothesis. This implies that past information on inflation can help improve the one-step-ahead prediction of inflation uncertainty but not vice versa. Our results have some important policy implications.
Keywords: Inflation; Inflation uncertainty; Seasonality; Long memory; Time-varying causality; Markov switching model (search for similar items in EconPapers)
JEL-codes: C12 C32 E31 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014115000278
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Causality between Inflation and Inflation Uncertainty in South Africa: Evidence from a Markov-Switching Vector Autoregressive Model (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:24:y:2015:i:c:p:46-68
DOI: 10.1016/j.ememar.2015.05.003
Access Statistics for this article
Emerging Markets Review is currently edited by Jonathan A. Batten
More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().