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How does inflation determine inflation uncertainty? A Chinese perspective

Chi-Wei Su (), Hui Yu, Hsu-Ling Chang and Xiao-Lin Li ()
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Chi-Wei Su: Ocean University of China
Hui Yu: Ocean University of China
Hsu-Ling Chang: Ling Tung University
Xiao-Lin Li: Ocean University of China

Quality & Quantity: International Journal of Methodology, 2017, vol. 51, issue 3, 1417-1434

Abstract: Abstract Using a bootstrap Granger full-sample causality test and a sub-sample rolling window estimation, this paper examines the causal link between inflation and inflation uncertainty in China. The results show that high inflation leads to high inflation uncertainty, supporting Friedman-Ball’s hypothesis (1992) and Holland’s theory (J Money Credit Bank 27:827–837, 1995). Furthermore, significant feedback exists from inflation uncertainty to inflation in some periods, supporting Holland’s theory (J Money Credit Bank 27:827–837, 1995) that inflation uncertainty has a negative effect on inflation. We find that the relationship between inflation and inflation uncertainty varies across time. The Chinese monetary authority needs to ensure a quick and effective policy response to inflation development because doing so will help reduce inflation, eliminate many of the costs associated with high inflation and therefore minimize the marginal effect of inflation on inflation uncertainty. However, quantitative tools for China’s monetary policy are also warranted. In the long term, the importance of keeping inflation low, stable, and predictable cannot be overemphasized.

Keywords: Inflation; Inflation uncertainty; Rolling window; Bootstrap; Time-varying causality; GJR-GARCH (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2017
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