Rizvi, Syed Kumail Abbas and Naqvi, Bushra (2008): Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan.
Download (435Kb) | Preview
This paper is first attempt to measure and analyze inflation uncertainty in Pakistan and it provides several contributions. Using quarterly data from 1976:01 to 2008:02, at first stage we model inflation uncertainty as time varying process through GARCH framework. At second stage asymmetric behavior of inflation uncertainty is analyzed by using GJR-GARCH and EGARCH models, for further analysis of asymmetry and leverage effects, we developed news impact curves proposed by Pagan and Schwert (1990). Finally we investigate the causality and its direction between inflation and inflation uncertainty by using bivariate Granger-Causality test to know which inflation uncertainty hypothesis (Friedman-Ball or Cukierman- Meltzer) holds true for Pakistani data. We get two important results. First, GJR-GARCH and EGARCH models are more successful in capturing inflation uncertainty and its asymmetric behavior as compared to simple GARCH model. This can also be seen from news impact curves. Second, there is strong evidence that Friedman-Ball inflation uncertainty hypothesis holds true for Pakistan.
|Item Type:||MPRA Paper|
|Original Title:||Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan|
|English Title:||Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan|
|Keywords:||Inflation, Uncertainty, GJR-GARCH, EGARCH|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
|Depositing User:||Syed Kumail Abbas Rizvi|
|Date Deposited:||22. Dec 2009 06:18|
|Last Modified:||13. Feb 2013 05:05|
Andersen, T.G., Bollerslev, T. 2006, "Volatility and Correlation Forecasting", Handbook of Economic Forecasting, Vol. 1.
Apergis, N. 2006, “Inflation, output growth, volatility and causality: evidence from panel data and G7 countries”, Economics Letters, 83 (2004) 185-191.
Ball, L. 1992, “How does inflation raise inflation uncertainty?”, Journal of Monetary Economics, 29, 371-388.
Berument, H. et al 2001, “Modeling Inflation Uncertainty Using EGARCH: An Application to Turkey”, Bilkent University Discussion Paper.
Bilquees, F. 1988, “Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses”, The Pakistan Development Review 27:2, 109–130.
Bollerslev, T. 1986, “Generalized Autoregressive Conditional Heteroscedasticity”, Journal of Econometrics, 31, 307-327.
Bollerslev, T., and J.M. Wooldridge, 1992, “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariances”, Econometric Reviews, 11, 143-172.
Bokil, M. and Schimmelpfennig, A. 2005, “Three Attempts at Inflation Forecasting in Pakistan”, IMF Working Paper, WP/05/105.
Bordes, C. et al 2007, “Money and Uncertainty in the Philippines: A Friedmanite perspective”, Conference paper, Asia-Link Program.
Bordes, C. and Maveyraud, S. 2008, “The Friedman’s and Mishkin’s Hypotheses (re)considered”, Unpublished.
Brunner, A.D. and Hess, G.D. 1993, “Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach”, Journal of Business & Economic Statistics, Vol. 11, No. 2, (Apr., 1993), pp. 187-197.
Brunner, A.D. and Simon, D.P. 1996, “Excess Returns and Risk at the long End of The Treasury Market: an EGARCH-M Approach”, The Journal of Financial Research, 14, 1, 443-457.
Caporale, T and McKiernan, B. 1997, “High and Variable Inflation: Further Evidence on the Friedman Hypothesis”, Economic Letters 54, 65-68.
Chaudhary, M. Aslam, and Naved Ahmad, 1996, “Sources and Impacts of Inflation in Pakistan,” Pakistan Economic and Social Review, Vol. 34, No. 1, pp. 21–39.
Cosimano, T. and Dennis, J. 1988, “Estimation of the Variance of US Inflation Based upon the ARCH Model”, Journal of Money, Credit, and Banking, 20(3) 409-423.
Crowford, A. and Kasumovich, M. 1996, “Does Inflation Uncertainty vary with the Level of Inflation?”, Bank of Canada, Ottawa Ontario Canada K1A 0G9.
Engle, R. 1982, “Autoregressive Conditional Heteroscedasticity with Estimates of United Kingdom Inflation”, Econometrica, 987-1007.
Fountas, S. et al 2000, “A GARCH model of Inflation and Inflation Uncertainty with Simultaneous Feedback”.
Fountas, S. et al 2006, “Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance”, Oxford Bulletin of Economics and Statistics, 68, 3 (2006) 0305-9049.
Franses, P.H. 1990, “Testing For Seasonal Unit Roots in Monthly Data”, Econometric Institute Report, No.9032A, Erasmus University, Rotterdam.
Friedman, M. 1977, “Nobel Lecture: Inflation and Unemployment”, Journal of Political Economy, Vol. 85, 451- 472.
Glosten, L. R., R. Jagannathan and D. Runkle, 1993, “On the Relations between the Expected Value and the Volatility of the Normal Excess Return on Stocks”, Journal of Finance, 48, 1779‐ 1801.
Golob, John E. 1994, “Does inflation uncertainty increase with inflation?”, Federal Reserve Bank of Kansas City - Economic Review. Third Quarter 1994.
Grier,K., Perry, M. 2000, “The effects of real and nominal uncertainty on inflation and output growth: some GARCH-M evidence”, Journal of Applied Econometric 15, 45-48.
Holland, A. S. 1984, “Does Higher Inflation Lead to More Uncertain Inflation?”, Federal Reserve Bank of St. Louis Review 66, 15-26.
Hafer, R. W. 1985, “Inflation Uncertainty and a test of the Friedman Hypothesis”, Federal Reserve Bank of St. Louis Working Paper 1985-006A.
Hu, M.Y., C.X. Jiang, and C. Tsoukalas, 1997, “The European Exchange Rates Before and After the Establishment of the European Monetary System”, Journal of International Financial Markets, Institutions and Money, 7, 235- 253.
Khalid, A. M. 2005, “Economic Growth, Inflation and Monetary Policy in Pakistan: Preliminary Empirical Estimates”, The Pakistan Development Review,44 : 4 Part II (Winter 2005) pp. 961–974.
Khan, M. S., and S. A. Senhadji 2001, “Threshold Effects in the Relationship between Inflation and Growth”, IMF Staff Papers 48:1.
Khan, A. H., and M. A. Qasim 1996’ “Inflation in Pakistan Revisited”, The Pakistan Development Review 35:4, 747–759.
Khan, M. S., and A. Schimmelpfennig 2006, “Inflation in Pakistan: Money or Wheat?”, IMF Working Paper, wp/06/60.
Koutmos, G., and G.G. Booth, 1995, “Asymmetric Volatility Transmission in International Stock Markets”, Journal of International Money and Finance, 14, 747-762.
Malik, W. Shahid and Ahmad, A. Maqsood 2007, “The Taylor Rule and the Macroeconomic performance in Pakistan”, The Pakistan Development Review, 2007:34.
Malik, W. Shahid 2006, “Money, Output and Inflation: Evidence from Pakistan”, The Pakistan Development Review 46:4.
Nas, T. F. and M.J. Perry, 2000, “Inflation, Inflation Uncertainty and Monetary Policy in Turkey”, Contemporary Economic Policy, 18, 170-180.
Nelson, D.B. 1991, “Conditional Heteroscedasticity in Asset Returns: A New Approach”, Econometrica, 59, 347-370.
Price, Simon, and Anjum Nasim, 1999, “Modeling Inflation and the Demand for Money in Pakistan: Cointegration and the Causal Structure,” Economic Modeling, Vol. 16, pp. 87–103.
Thornton, J. 2006, “High and variable inflation: further evidence on the Fried- man hypothesis”, Southern African Journal of Economics, 74, 167-71.
Tse, Y., and G.G. Booth, 1996, “Common Volatility and Volatility Spillovers Between U.S. and Eurodollar Interest Rates: Evidence from The Features Market”, Journal of Economics and Business, 48, 299-312
Qayyum, A. 2006, “Money, Inflation and Growth in Pakistan”, The Pakistan Development Review 45 : 2 (Summer 2006) pp. 203–212.
Zivot, E. 2008, “Practical Issues in the Analysis of Univariate GARCH Models”, Unpublished.