Nonlinearities and the nexus between inflation and inflation uncertainty in Egypt: New evidence from wavelet transform framework

Bouoiyour, Jamal and Selmi, Refk (2014): Nonlinearities and the nexus between inflation and inflation uncertainty in Egypt: New evidence from wavelet transform framework.

Abstract

The present study re-examines whether the direction of connection between inflation varies over time. To this end, we have used an optimal GARCH model among various extensions to determine an appropriate measure of inflation uncertainty and a nonlinear causality test approximated by Taylor within a wavelet transform framework. The shortest time horizon results (high frequencies) provide strong support for the Cukierman-Meltzer hypothesis, while there is strong evidence affirming the Friedman-Ball hypothesis at the highest time horizon (low frequencies). Possible explanations of the first outcome may be the unsustainability of prevailing fiscal policy following the oil price crash, the liability dollarization and the inefficiency of financial intermediation. However, the stabilization efforts since the mid-1990s and the deep of economic integration make Egypt more prone to external shocks and better equipped to cope with them, explaining therefore the second outcome.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, inflation uncertainty, GARCH, wavelets, nonlinear causality.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

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