TIME VARIATION OR ASYMMETRY? THE INFLATION AND INFLATION UNCERTAINTY NEXUS: A CASE OF CHINA
Yixin Ren and
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Xue Gao: College of Economics and Management Shandong, University of Science and Technology 579, Qianwan Gang Rd., Qingdao, P. R. China†College of International Business, Qingdao Huanghai University, 1145 Linghai Road, West Coast New Area, Qingdao, P. R. China
Yixin Ren: College of Economics and Management Shandong, University of Science and Technology 579, Qianwan Gang Rd., Qingdao, P. R. China
Xin Li: Antai College of Economics & Management, Shanghai Jiao Tong University 1954, Huashan Rd., Shanghai, P. R. China
The Singapore Economic Review (SER), 2021, vol. 66, issue 03, 881-903
This investigation tests the dynamic and quantile causality between inflation and inflation uncertainty of China with constructing a rolling-window based quantile causality test. The result shows unidirectional causality from inflation to inflation uncertainty, which is significantly asymmetric and time-varying. Inflation more likely causes inflation uncertainty in higher quantiles, indicating the linear model based on conditional mean may overestimate this impact in a lower quantile interval. Furthermore, the influence also exhibits a consistent time-varying property that cannot be explained simply by the conditional distribution. The causality shows more significance since 2007 when China cancelled the mandatory settlement system, which led to the increase of monetary policy independence. The time-varying nature indicates institutional changes may lead to regime switching of this causality. Our result supports the Friedman–Ball hypothesis [Friedman, M (1977). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85(3), 451–472; Ball, L (1992). Why does high inflation raise inflation uncertainty? Journal of Monetary Economic, 29(3), 371–388] to a certain extent and implies that the purpose of controlling inflation uncertainty of China can be achieved by controlling inflation if and only if it is relatively high on the premise of the independence of monetary policy.
Keywords: Inflation; inflation uncertainty; rolling window; quantile causality (search for similar items in EconPapers)
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