The effect of inflation uncertainty on inflation: stochastic volatility in mean model within a dynamic framework

Date

2009

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Source Title

Economic Modelling

Print ISSN

0264-9993

Electronic ISSN

1873-6122

Publisher

Elsevier BV

Volume

26

Issue

6

Pages

1201 - 1207

Language

English

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Abstract

This paper investigates the effect of inflation uncertainty innovations on inflation over time by considering the monthly United States data for the time period 1976-2006. In order to investigate the effect of inflation uncertainty innovation on inflation, a Stochastic Volatility in Mean model (SVM) has been employed. SVM models are generally used to capture the innovation to inflation uncertainty, which cannot be achieved in the framework of popular deterministic ARCH type of models. Empirical evidence provided here suggests that innovations in inflation volatility increases inflation persistently. This evidence is robust across various definitions of inflation and different sub-periods. © 2009 Elsevier B.V. All rights reserved.

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