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Title:Is the relationship between inflation and its uncertainty linear? PDF Logo
Authors:Karanasos, Menelaos G.
Schurer, Stefanie
Issue Date:2007
Series/Report no.:Ruhr economic papers 18
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.
Subjects:GARCH-in-mean
inflation
level effect
nominal uncertainty
power transformation
JEL:C22
E31
ISBN:978-3-86788-012-1
Document Type:Working Paper
Appears in Collections:Ruhr Economic Papers, RWI
Publikationen von Forscherinnen und Forschern des RWI

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