Tsyplakov, Alexander (2010): The links between inﬂation and inﬂation uncertainty at the longer horizon.

PDF
MPRA_paper_26908.pdf Download (369kB)  Preview 
Abstract
In this paper I examine the Okun–Friedman hypothesis of the link between inﬂation and inﬂation uncertainty using historical international data on the monthly CPI. An indicator of inﬂation uncertainty at the twoyearsahead horizon is derived from a timeseries model of inﬂation with timevarying parameters by means of Monte Carlo simulations. This indicator is compared to other uncertainty measures, with the short forecast horizon and based on simpler GARCHtype models. The analysis convincingly demonstrates that both the longer horizon and changing parameters are important for the regularity. The evidence obtained strongly supports the Okun–Friedman hypothesis both in the time dimension for most countries and across countries.
Item Type:  MPRA Paper 

Original Title:  The links between inﬂation and inﬂation uncertainty at the longer horizon 
Language:  English 
Keywords:  inﬂation uncertainty, inﬂation forecasting, Okun–Friedman hypothesis, nonlinear state space models, scoring rules 
Subjects:  C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C29  Other C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E31  Price Level ; Inflation ; Deflation E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C22  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes 
Item ID:  26908 
Depositing User:  Alexander Tsyplakov 
Date Deposited:  22. Nov 2010 19:34 
Last Modified:  11. Feb 2013 11:41 
References:  Andrew Ang and Geert Bekaert and Min Wei, "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?", National Bureau of Economic Research (2005). Andrew Atkeson and Lee E. Ohanian, "Are Phillips Curves Useful For Forecasting Inflation?", Federal Reserve Bank of Minneapolis Quarterly Review 25, 1 (2001), pp. 211. Richard T. Baillie and ChingFan Chung and Margie A. Tieslau, "Analysing Inflation by the Fractionally Integrated ARFIMAGARCH Model", Journal of Applied Econometrics 11, 1 (1996), pp. 2340. Laurence Ball, "Why Does High Inflation Raise Inflation Uncertainty?", Journal of Monetary Economics 29, 3 (1992), pp. 371388. Laurence Ball and Stephen G. Cecchetti, "Inflation and Uncertainty at Short and Long Horizons", Brookings Papers on Economic Activity (1, 1990), pp. 215254. Robert J. Barro and David B. Gordon, "A Positive Theory of Monetary Policy in a Natural Rate Model", Journal of Political Economy 91, 4 (1983), pp. 589610. Robert J. Barro and David B. Gordon, "Rules, Discretion and Reputation in a Model of Monetary Policy", Journal of Monetary Economics 12, 1 (1983), pp. 101121. William A. Bomberger, "Disagreement as a Measure of Uncertainty", Journal of Money, Credit and Banking 28, 3 (1996), pp. 381392. Allan D. Brunner and Gregory D. Hess, "Are Higher Levels of Inflation Less Predictable? A StateDependent Conditional Heteroscedasticity Approach", Journal of Business & Economic Statistics 11, 2 (1993), pp. 187197. John A. Carlson, "A Study of Price Forecasts", in Annals of Economic and Social Measurement vol. 6, no. 1 (National Bureau of Economic Research, 1977), pp. 3363. Timothy Cogley and Thomas J. Sargent, "Evolving PostWorld War II U.S. Inflation Dynamics", NBER Macroeconomics Annual 16 (2001), pp. 331388. Timothy Cogley and Thomas J. Sargent, "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US", Review of Economic Dynamics 8, 2 (2005), pp. 262302. Alex Cukierman and Allan H. Meltzer, "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information", Econometrica 54, 5 (1986), pp. 10991128. Elton Daal and Atsuyuki Naka and Benito Sanchez, "ReExamining Inflation and Inflation Uncertainty in Developed and Emerging Countries", Economics Letters 89, 2 (2005), pp. 180186. George K. Davis and Bryce Kanago, "The Missing Link: IntraCountry Evidence on the Relationship between High and Uncertain Inflation from HighInflation Countries", Southern Economic Journal 63, 1 (1996), pp. 205222. George K. Davis and Bryce Kanago, "High and Uncertain Inflation: Results from a New Data Set", Journal of Money, Credit and Banking 30, 2 (1998), pp. 218230. G. K. Davis and Bryce Kanago, "The Level and Uncertainty of Inflation: Results from OECD Forecasts", Economic Inquiry 38, 1 (2000), pp. 5872. Richard A. Davis and Gabriel RodriguezYam, "Estimation for StateSpace Models Based on a Likelihood Approximation", Statistica Sinica 15 (2005), pp. 381406. Michael Devereux, "A Positive Theory of Inflation and Inflation Variance", Economic Inquiry 27, 1 (1989), pp. 105116. Francis X. Diebold and Todd A. Gunther and Anthony S. Tay, "Evaluating Density Forecasts with Applications to Financial Risk Management", International Economic Review 39, 4 (1998), pp. 863883. Francis X. Diebold and Anthony S. Tay and Kenneth F. Wallis, "Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters", in Robert F. Engle and Halbert White, ed., Cointegration, Causality and Forecasting: A Festschrift in Honor of Clive W. J. Granger (Oxford: Oxford University Press, 1999), pp. 7690. Matthew Doyle, "Empirical Phillips Curves in OECD Countries: Has There Been a Common Breakdown?", Iowa State University, Department of Economics (2006). John Driffill and Grayham E. Mizon and Alistair Ulph, "Costs of inflation", in Benjamin M. Friedman and Frank H. Hahn, ed., Handbook of Monetary Economics vol. 2, (Elsevier, 1990), pp. 10131066. Robert F. Engle, "Estimates of the Variance of U. S. Inflation Based upon the ARCH Model", Journal of Money, Credit and Banking 15, 3 (1983), pp. 286301. Martin Evans, "Discovering the Link Between Inflation Rates and Inflation Uncertainty", Journal of Money, Credit and Banking 23, 2 (1991), pp. 169184. Martin Evans and Paul Wachtel, "Inflation Regimes and the Sources of Inflation Uncertainty", Journal of Money, Credit and Banking 25, 3, Part 2 (1993), pp. 475511. WenShwo Fang and Stephen M. Miller and ChihChuan Yeh, "Does a Threshold Inflation Rate Exist? Quantile Inferences for Inflation and Its Variability", University of Connecticut, Department of Economics (2007). Edward Foster, "The Variability of Inflation", The Review of Economics and Statistics 60, 3 (1978), pp. 346350. Stilianos Fountas and Menelaos Karanasos and Jinki Kim, "Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance", Oxford Bulletin of Economics and Statistics 68, 3 (2006), pp. 319343. Milton Friedman, "Nobel Lecture: Inflation and Unemployment", The Journal of Political Economy 85, 3 (1977), pp. 451472. William A. Gale, "Temporal Variability of United States Consumer Price Index", Journal of Money, Credit and Banking 13, 3 (1981), pp. 273297. Anthony Garratt and Kevin Lee and M. Hashem Pesaran and Yongcheol Shin, "Forecast Uncertainties in Macroeconomic Modeling: An Application to the U.K. Economy", Journal of the American Statistical Association 98, 464 (2003), pp. 829838. Petra M. Geraats, "Inflation and Its Variation: An Alternative Explanation", University of Cambridge (2006). Tilmann Gneiting and Adrian E. Raftery, "Strictly Proper Scoring Rules, Prediction, and Estimation", Journal of the American Statistical Association 102 (2007), pp. 359378. Tilmann Gneiting and Fadoua Balabdaoui and Adrian E. Raftery, "Probabilistic Forecasts, Calibration and Sharpness", Journal of the Royal Statistical Society: Series B 69 (2007), pp. 243268. John E. Golob, "Inflation, Inflation Uncertainty, and Relative Price Variability: A Survey", Federal Reserve Bank of Kansas City (1993). Bruce E. Hansen, "Autoregressive Conditional Density Estimation", International Economic Review 35, 3 (1994), pp. 705730. Ólan T. Henry and Nilss Olekalns and Sandy Suardi, "Testing for Rate Dependence and Symmetry in Inflation Uncertainty: Evidence from the G7 Economies", Economics Letters 94, 3 (2007), pp. 383388. Gregory D. Hess and Charles S. Morris, "The LongRun Costs of Moderate Inflation", Federal Reserve Bank of Kansas City Economic Review 81, Q II (1996), pp. 7188. Holland, A Steven, "Uncertain Effects of Money and the Link between the Inflation Rate and Inflation Uncertainty", Economic Inquiry 31, 1 (1993), pp. 3951. A. Steven Holland, "Inflation and Uncertainty: Tests for Temporal Ordering", Journal of Money, Credit and Banking 27, 3 (1995), pp. 827837. Borus Jungbacker and Siem Jan Koopman, "Monte Carlo Estimation for Nonlinear NonGaussian State Space Models", Biometrika 94, 4 (2007), pp. 827839. Kim, ChangJin, "UnobservedComponent Time Series Models with MarkovSwitching Heteroscedasticity: Changes in Regime and the Link between Inflation Rates and Inflation Uncertainty", Journal of Business & Economic Statistics 11, 3 (1993), pp. 341349. A. Kontonikas, "Inflation and Inflation Uncertainty in the United Kingdom, Evidence from GARCH Modelling", Economic Modelling 21, 3 (2004), pp. 525543. Julia Lendvai, "Inflation Dynamics and Regime Shifts", European Central Bank (2006). Dennis E. Logue and Thomas D. Willett, "A Note on the Relation between the Rate and Variability of Inflation", Economica 43, 170 (1976), pp. 151158. Guillermo Mondino and Federico Sturzenegger and Mariano Tommasi, "Recurrent High Inflation and Stabilization: A Dynamic Game", International Economic Review 37, 4 (1996), pp. 981996. Arthur M. Okun, "The Mirage of Steady Inflation", Brookings Papers on Economic Activity , 2 (1971), pp. 485498. A. R. Pagan and A. D. Hall and P. K. Trivedi, "Assessing the Variability of Inflation", The Review of Economic Studies 50, 4 (1983), pp. 585596. Rati Ram, "Level and Variability of Inflation: TimeSeries and CrossSection Evidence from 117 Countries", Economica 52, 206 (1985), pp. 209223. Robert Rich and Joseph Tracy, "Uncertainty and Labor Contract Durations", The Review of Economics and Statistics 86, 1 (2004), pp. 270287. Richard, JeanFrançois and Zhang, Wei, "Efficient HighDimensional Importance Sampling", Journal of Econometrics 141, 2 (2007), pp. 13851411. Junji Shimada and Yoshihiko Tsukuda, "Estimation of Stochastic Volatility Models: An Approximation to the Nonlinear State Space Representation", Communications in Statistics  Simulation and Computation 34, 2 (2005), pp. 429450. James H. Stock and Mark W. Watson, "Why Has U.S. Inflation Become Harder to Forecast?", Journal of Money, Credit and Banking 39, s1 (2007), pp. 333. James H. Stock and Mark W. Watson, "Phillips Curve Inflation Forecasts", National Bureau of Economic Research (2008). John Thornton, "The Relationship between Inflation and Inflation Uncertainty in Emerging Market Economies", Southern Economic Journal 73, 4 (2007), pp. 858870. Pravin K Trivedi and David M Zimmer, "Copula Modeling: An Introduction for Practitioners", Foundations and Trends® in Econometrics 1, 1 (2006), pp. 1111. Meyer Ungar and BenZion Zilberfarb, "Inflation and Its Unpredictability Theory and Empirical Evidence", Journal of Money, Credit and Banking 25, 4 (1993), pp. 709720. Paul Wachtel, "Survey Measures of Expected Inflation and Their Potential Usefulness", in Joel Popkin, ed., Analysis of Inflation: 19651974 (National Bureau of Economic Research, 1977), pp. 361402. K. F. Wallis, "Forecast Uncertainty, Its Representation and Evaluation", in Roberto S. Mariano and YiuKuen Tse, ed., Econometric Forecasting and HighFrequency Data Analysis vol. 13, (World Scientific Publishing Company, 2008). Victor Zarnowitz and Louis A. Lambros, "Consensus and Uncertainty in Economic Prediction", The Journal of Political Economy 95, 3 (1987), pp. 591621. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/26908 