The links between inﬂation and inﬂation uncertainty at the longer horizon
MPRA Paper from University Library of Munich, Germany
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 countries.
Keywords: inﬂation uncertainty; inﬂation forecasting; Okun–Friedman hypothesis; nonlinear state space models; scoring rules (search for similar items in EconPapers)
JEL-codes: C22 C29 C32 E31 E52 (search for similar items in EconPapers)
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