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

Bouoiyour, Jamal and Selmi, Refk (2013): Nonlinearities and the nexus between inflation and inflation uncertainty in Egypt: New evidence from wavelets transform framework.

Abstract

How does inflation uncertainty interact with inflation rate? The purpose of this article is to assess this question in Egypt in a wavelets transform framework. We investigate the direction of causality in the relationship inflation-inflation uncertainty by combining component GARCH model, wavelets decomposition and scale-by-scale nonlinear causality test. We find a strong evidence in favor of Friedman-ball hypothesis in both time domain and the different frequencies. This study succeeds to resolve the inconsistencies and to point a robust nonlinear effect of inflation on inflation uncertainty, which is more intense at high frequency bands than at low ones. We attribute this result to the complexity in predicting how strongly and how quickly prices will respond to monetary policy, the asymmetry between inflation booms and recessions, the incidence of exogenous shocks, the co-movement of permanent shocks with inflation and the downward expectations of monetary authorities.

• 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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