Nonlinear relationship between inflation and inflation uncertainty in Taiwan

Shyh-Wei Chen, Chung-Hua Shen and Zixiong Xie

Applied Economics Letters, 2006, vol. 13, issue 8, 529-533

Abstract: Using Taiwan data, the study employs Hamilton's (2001) flexible regression model to investigate the relationship between inflation and inflation uncertainty. The results convincingly support Friedman's hypothesis that a rise in the inflation rate increases inflation uncertainty. This result, however, holds only in a positive inflation regime. When the inflation rate is in a negative inflation regime, one clearly notes that a drop in the inflation rate also increases inflation uncertainty. Thus Friedman's argument is complemented by advocating that a rise in the absolute inflation rate increases inflation uncertainty. Turning to Cukierman-Meltzer's hypothesis, both linear and nonlinear inflation uncertainties affect the inflation rate, where the former has positive but the latter has negative effects.

Date: 2006
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DOI: 10.1080/13504850500400405

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