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Quality & Quantity

, Volume 51, Issue 3, pp 1417–1434 | Cite as

How does inflation determine inflation uncertainty? A Chinese perspective

  • Chi-Wei Su
  • Hui Yu
  • Hsu-Ling Chang
  • Xiao-Lin LiEmail author
Article
  • 341 Downloads

Abstract

Using a bootstrap Granger full-sample causality test and a sub-sample rolling window estimation, this paper examines the causal link between inflation and inflation uncertainty in China. The results show that high inflation leads to high inflation uncertainty, supporting Friedman-Ball’s hypothesis (1992) and Holland’s theory (J Money Credit Bank 27:827–837, 1995). Furthermore, significant feedback exists from inflation uncertainty to inflation in some periods, supporting Holland’s theory (J Money Credit Bank 27:827–837, 1995) that inflation uncertainty has a negative effect on inflation. We find that the relationship between inflation and inflation uncertainty varies across time. The Chinese monetary authority needs to ensure a quick and effective policy response to inflation development because doing so will help reduce inflation, eliminate many of the costs associated with high inflation and therefore minimize the marginal effect of inflation on inflation uncertainty. However, quantitative tools for China’s monetary policy are also warranted. In the long term, the importance of keeping inflation low, stable, and predictable cannot be overemphasized.

Keywords

Inflation Inflation uncertainty Rolling window Bootstrap Time-varying causality GJR-GARCH 

JEL Classification

C22 E31 

Notes

Acknowledgments

This research is supported by the National Social Science Foundation (Grant number: 15BJY155), and Ministry of Education’s Humanities and Social Science Research Project (Grant number: 14YJA790049).

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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • Chi-Wei Su
    • 1
  • Hui Yu
    • 1
  • Hsu-Ling Chang
    • 2
  • Xiao-Lin Li
    • 1
    Email author
  1. 1.Department of FinanceOcean University of ChinaQingdaoChina
  2. 2.Department of Accounting and InformationLing Tung UniversityTaichungTaiwan

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