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The links between inflation and inflation uncertainty at the longer horizon

Alexander Tsyplakov

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: In this paper I examine the Okun-Friedman hypothesis of the link between inflation and inflation uncertainty using historical international data on the monthly CPI. An indicator of inflation uncertainty at the two-years-ahead horizon is derived from a time-series model of inflation with time-varying parameters by means of Monte-Carlo simulations. This indicator is compared to other uncertainty measures, with the short forecast horizon and based on simpler GARCH-type models. The analysis convincingly demonstrates that both the longer horizon and changing parameters are important for the regularity. The evidence obtained strongly supports the Okun-Friedman hypothesis both in the time dimension for most countries and across countires.

JEL-codes: C22 C29 C32 E31 E52 (search for similar items in EconPapers)
Date: 2010-11-06
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