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Inflation and inflation volatility in Thailand

Akhand Hossain () and Popkarn Arwatchanakarn ()

Applied Economics, 2016, vol. 48, issue 30, 2792-2806

Abstract: Quarterly data for Thailand are used in this article for the period 1965q3--2013q4 to investigate both the relationship between inflation and inflation volatility, and the impact of inflation volatility on economic growth. Inflation volatility is estimated by deploying the generalized autoregressive conditional heteroscedastic (GARCH) technique. A Granger causality test is then conducted to examine the causality between inflation and inflation volatility. The empirical results obtained are consistent with a number of theoretical propositions. First, the results are consistent with the Friedman--Ball proposition, which states that a rise in inflation raises inflation volatility. Second, there is evidence supporting the Holland proposition that inflation volatility lowers the rate of inflation. This is consistent with the view that central banks attempt to stabilize inflation with the rise in inflation volatility. Third, empirical results obtained by asymmetric GARCH models suggest that inflation shocks have an asymmetric impact on inflation volatility (i.e. a positive inflation shock has a larger impact on inflation volatility -- as measured by the logarithm of the conditional variance of inflation -- than a negative inflation shock). Fourth, inflation volatility has an adverse impact on economic growth. Finally, given the fixed/pegged or managed float exchange rate system, US inflation has been found to have a positive impact on inflation and its volatility in Thailand. This article discusses the implications of empirical findings on the design and enactment of monetary policy for price stability in Thailand.

Date: 2016
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DOI: 10.1080/00036846.2015.1130215

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