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On the Inflation-Uncertainty Hypothesis in The Gambia: A Multi-Sample View on Causality Linkages

Mendy, David and Widodo, Tri (2018): On the Inflation-Uncertainty Hypothesis in The Gambia: A Multi-Sample View on Causality Linkages.

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Abstract

The connection between inflation and inflation-uncertainty hypothesis has been tested in so many countries, yet in The Gambia testing the relationship and accounting for structural changes as not been given serious attention to the literature. This paper modelled the inflation-uncertainty hypothesis using monthly inflation series from 1970(1)-2017(5). The GJR-GARCH model was used to generate the conditional variance of the inflation proxied as inflation uncertainty. Then the Pearson correlation was employed across the various samples, and the results vary in sign and magnitude reflecting structural changes within The Gambia’s economy. Finally, Toda Yamamoto (1995) causality test was employed. The results show strong support of a feedback relationship for both the Friedman-Ball and Cukierman-Meltzer hypothesis for the full sample as well as the post Economy Reform Program (ERP) sample; while during the Inflation Targeting Era (ITE) sample; the results indicate strong support of the Friedman-Ball hypothesis and no support of Cukierman-Meltzer hypothesis. The results provide evidence for both empirical and policy implications for the Central Bank. Firstly, the findings provide additional insights into the dynamic relationship between inflation and inflation uncertainty in The Gambia. Secondly, the findings provide policy implication for The Gambian monetary authority to adopt Inflation targeting (IT) as a policy tool.

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