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Relationship between Inflation and Inflation Uncertainty in Iran: An Application of SETAR-GARCH Model

Mohammad Ali Falahi () and Mehdi Hajamini ()
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Mohammad Ali Falahi : Ferdowsi University of Mashhad
Mehdi Hajamini : Yazd University

Journal of Money and Economy, 2015, vol. 10, issue 2, 69-91

Abstract: The purpose of this paper is to investigate the relationship between the inflation and inflation uncertainty in Iran. Using mixed models of self-exciting threshold autoregressive (SETAR) and generalized autoregressive conditional heteroskedasticity (GARCH), the inflation behaviors are examined for the period 1990M05-2013M10. This approach allows testing the hypotheses of Friedman-Ball, Pourgerami-Maskus, Cukierman-Meltzer, and Holland during different inflationary regimes. The results indicate that an increase in Iran's inflation leads to higher inflation uncertainty, as predicted by Friedman-Ball Hypothesis, while the other three hypotheses are not confirmed. Positive unidirectional causality from inflation to uncertainty seems to be significant only in periods of relatively higher inflation, but not in periods of low inflation. The finding is important because it confirms the existence of regime-dependent effect of inflation on public's expectations about future inflation; that, in trend, it reduces economic activity and misallocates resources. This is a new insight about asymmetric behaviour of inflation in Iran that has noteworthy implications for policy-makers, especially for price stabilizing and inflation targeting.

Keywords: Inflation uncertainty; Nonlinearity; Self-exciting threshold autoregressive; Iran (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:mbr:jmonec:v:10:y:2015:i:2:p:69-91