Is the Relationship Between Inflation and its Uncertainty Linear?

Menelaos Karanasos and Stefanie Schurer

No 18, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: We use parametric power ARCH models of the conditional variance of inflation to model the relationship between inflation and its uncertainty using monthly data for Germany, the Netherlands and Sweden over a period ranging from 1962 to 2004.For all three countries inflation significantly raises inflation uncertainty as predicted by Friedman. Increased uncertainty affects inflation in all countries but not in the same manner.For Sweden we find a negative impact in accordance with the Holland hypothesis, whereas for Germany and the Netherlands we find the opposite in support of the Cukierman-Meltzer hypothesis. In a sensitivity analysis we show that an arbitrary choice of the heteroskedasticity parameter influences this relationship significantly.

Keywords: GARCH-in-mean; inflation; level effect; nominal uncertainty; power transformation (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2007
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Related works:
Journal Article: Is the Relationship between Inflation and Its Uncertainty Linear? (2008)
Journal Article: Is the Relationship between Inflation and Its Uncertainty Linear? (2008)
Working Paper: Is the relationship between ination and its uncertainty linear? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:18

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