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Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries

Don Bredin () and Stilianos Fountas ()

No 125, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over the last forty years. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman's belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., by short-run inflation uncertainty

Keywords: Inflation; Inflation uncertainty; Markov process; regime-switching heteroskedasticity (search for similar items in EconPapers)
JEL-codes: E31 C22 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:125

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