Inflation and inflation uncertainty: a dynamic framework
Berument, M. H.
Physica A: Statistical Mechanics and its Applications
4816 - 4826
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This paper aims to investigate the direct relationship between inflation and inflation uncertainty by employing a dynamic method for the monthly country-region-place United States data for the time period 1976-2007. While the bulk of previous studies has employed GARCH models in investigating the link between inflation and inflation uncertainty, in this study Stochastic Volatility in Mean models are used to capture the shocks to inflation uncertainty within a dynamic framework. These models allow researchers to assess the dynamic effects of innovations in inflation as well as inflation volatility on inflation and inflation volatility over time, by incorporating the unobserved volatility as an explanatory variable in the mean (inflation) equation. Empirical findings suggest that innovations in inflation volatility increases inflation. This evidence is robust across various definitions of inflation and different sub-periods. © 2012 Elsevier B.V. All rights reserved.
Stochastic volatility models