Advertisement

Asymmetric Causality Between Inflation and Uncertainty: Evidences from 33 Developed and Developing Countries

  • Mehdi HajaminiEmail author
Original Article
  • 2 Downloads

Abstract

Empirical studies have provided conflicting findings about the relationship between inflation and inflation uncertainty. Thus, the direction of the causality is still questionable. The present paper is aimed to extend the existing literature using non-linearity models and asymmetric causality tests. For this purpose, the data for 33 developed and developing countries during 1988Q4-2016Q3 is used. The results showed an asymmetry in the inflation behavior which is specified by smooth transition process, as well as separating positive and negative shocks observed in causality test. The asymmetric causality between inflation and inflation uncertainty is confirmed in most countries, although the empirical evidence in favor of Cukierman-Meltzer hypothesis is found to be weaker than Friedman-Ball hypothesis.

Keywords

Inflation Inflation uncertainty Smooth transition autoregressive Asymmetric causality 

JEL classification

C22 C32 E31 

Notes

References

  1. Albulescu, C., A.K. Tiwari, S.M. Miller, and R. Gupta. 2019. Time-frequency relationship between inflation and inflation uncertainty for the US: evidence from historical data. Scottish Journal of Political Economy.  https://doi.org/10.1111/sjpe.12207.Google Scholar
  2. Amano, R. 2007. Inflation persistence and monetary policy: A simple result. Economics Letters 94: 26–31.Google Scholar
  3. Bacon, D.W., and D.G. Watts. 1971. Estimating the transition between two intersecting straight lines. Biometrika 58: 525–534.Google Scholar
  4. Baillie, R., C. Chung, and A. Tieslau. 1996. Analysing inflation by the fractionally integrated ARFIMA-GARCH model. Journal of Applied Econometrics 11: 23–40.Google Scholar
  5. Balaji, B., S.R.S. Durai, and M. Ramachandran. 2016. The dynamics between inflation and inflation uncertainty: Evidence from india. Journal of Quantitative Economics 14 (1): 1–14.Google Scholar
  6. Balcilar, M., Z.A. Ozdemir, and E. Cakan. 2011. On the nonlinear causality between inflation and inflation uncertainty in the G3 countries. Journal of Applied Economics. 14 (2): 269–296.Google Scholar
  7. Ball, L. 1992. Why does high inflation raise inflation uncertainty? Journal of Monetary Economics 29: 371–388.Google Scholar
  8. Berument, H., and N.N. Dincer. 2005. Inflation and inflation uncertainty in the G-7 countries. Physica A 348: 371–379.Google Scholar
  9. Bhar, R., and M. Mallik. 2010. Inflation, inflation uncertainty and output growth in the USA. Physica A 389: 5503–5510.Google Scholar
  10. Bollerslev, T. 1986. Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics 31: 307–327.Google Scholar
  11. Buth, B., M. Kakinaka, and H. Miyamoto. 2015. Inflation and inflation uncertainty: The case of Cambodia, Lao PDR, and Vietnam. Journal of Asian Economics 28: 31–43.Google Scholar
  12. Chan, K.S. 1993. Consistency and limiting distribution of the least squares estimator of a threshold autoregressive model. The Annals of Statistics 21: 520–533.Google Scholar
  13. Chan, K.S., and H. Tong. 1986. A note on certain integral equations associated with non-linear series analysis. Probability Theory and Related Fields 73: 153–158.Google Scholar
  14. Chang, K.-L. 2012. The impacts of regime-switching structures and fat-tailed characteristics on the relationship between inflation and inflation uncertainty. Journal of Macroeconomics 34: 523–536.Google Scholar
  15. Chen, S.-W., and C.-S. Hsu. 2016. Threshold, smooth transition and mean reversion in inflation: New evidence from European countries. Economic Modelling 53: 23–36.Google Scholar
  16. Chesang, L.K., and R. Naraidoo. 2016. Parameter uncertainty and inflation dynamics in a model with asymmetric central bank preferences. Economic Modelling 56: 1–10.Google Scholar
  17. Chowdhury, K.B., S. Kundu, and N. Sarkar. 2018. Regime-dependent effects of uncertainty on inflation and output growth: Evidence from the United Kingdom and the United States. Scottish Journal of Political Economy. 65: 390–413.Google Scholar
  18. Civelli, A., and N. Zaniboni. 2014. Supply side inflation persistence. Economics Letters 125: 191–194.Google Scholar
  19. Cogley, T., and T.J. Sargent. 2002. Evolving post-World War II U.S. inflation dynamics. NBER Macroeconomics Annual. 16: 331–388.Google Scholar
  20. Conrad, C., and M. Karanasos. 2005a. On the inflation-uncertainty hypothesis in the USA, Japan and the UK: A dual long-memory approach. Japan and the World Economy 17: 327–343.Google Scholar
  21. Conrad, C., and M. Karanasos. 2005b. Dual long memory in inflation dynamics across countries of the Euro area and the link between inflation uncertainty and macroeconomic performance. Studies in Nonlinear Dynamics and Econometrics. 9 (4): 5.Google Scholar
  22. Cuikerman, A., and A. Meltzer. 1986. A theory of ambiguity, credibility and inflation under discretion and asymmetric information. Econometrica 54: 1099–1128.Google Scholar
  23. Cukierman, A. 1992. Central bank strategy, credibility, and independence. Cambridge, MA: MIT Press.Google Scholar
  24. Daal, E., A. Naka, and B. Sanchez. 2005. Re-examining inflation and inflation uncertainty in developed and emerging countries. Economics Letters 89: 180–186.Google Scholar
  25. Daniela, Z., C. Mihail-Ioana, and P. Sorina. 2014. Inflation uncertainty and inflation in the case of Romania, Czech Republic, Hungary, Poland and Turkey. Procedia Economics and Finance 15: 1225–1234.Google Scholar
  26. Dmitriev, M., and E.K. Kersting. 2016. Inflation level and inflation volatility: A seigniorage argument. Economics Letters 147: 112–115.Google Scholar
  27. Doyle, M., and B. Falk. 2010. Do asymmetric central bank preferences help explain observed inflation outcomes? Journal of Macroeconomics 32: 527–540.Google Scholar
  28. Eitrheim, Ø., and T. Teräsvirta. 1996. Testing the adequacy of smooth transition autoregressive models. Journal of Econometrics 74: 59–75.Google Scholar
  29. Engle, R.F. 1982. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50: 987–1007.Google Scholar
  30. Evans, M. 1991. Discovering the link between inflation rates and inflation uncertainty. Journal of Money, Credit, and Banking 23: 169–184.Google Scholar
  31. Falahi, M.A., and M. Hajamini. 2015. Relationship between inflation and inflation uncertainty in Iran: An application of SETAR-GARCH model. Journal of Money and Economy 10 (2): 69–90.Google Scholar
  32. Falahi, M.A., and M. Hajamini. 2017. Asymmetric behavior of inflation in Iran: New evidence on inflation persistence using a smooth transition model. Iranian Economic Review 21 (1): 101–120.Google Scholar
  33. Fischer, S., R. Sahay, and C.A. Végh. 2002. Modern hyper- and high inflations. Journal of Economic Literature 40: 837–880.Google Scholar
  34. Fountas, S. 2010. Inflation, inflation uncertainty and growth: Are they related. Economic Modeling 27: 869–899.Google Scholar
  35. Fountas, S., and M. Karanasos. 2007. Inflation, output growth, and nominal and real uncertainty: Empirical evidence for the G7. Journal of International Money and Finance 26: 229–250.Google Scholar
  36. Friedman, M. 1977. Nobel lecture: Inflation and unemployment. Journal of Political Economy 85: 451–472.Google Scholar
  37. Giannellis, N. 2013. Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test. Research in Economics 67: 133–144.Google Scholar
  38. Golob, J.E. 1994. Does inflation uncertainty increase with inflation? Economic Review-Federal Reserve Bank of Kansas City 79: 27.Google Scholar
  39. Granger, C.W.J. 1969. Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37 (3): 424–438.Google Scholar
  40. Granger, C.W.J., and T. Teräsvirta. 1993. Modelling nonlinear economic relationships. Oxford: Oxford University Press.Google Scholar
  41. Grier, K.B., and M.J. Perry. 1996. Inflation, inflation uncertainty and relative price dispersion: evidence from bivariate GARCH-M models. Journal of Monetary Economics 38: 391–405.Google Scholar
  42. Grier, K.B., and M.J. Perry. 1998. On inflation and inflation uncertainty in the G7 countries. Journal of International Money and Finance 17: 671–689.Google Scholar
  43. Grier, K.B., and M.J. Perry. 2000. The effects of real and nominal uncertainty on inflation and output growth: Some GARCH-M evidence. Journal of Applied Econometrics 15: 45–58.Google Scholar
  44. Hansen, B.E. 1996. Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica 64: 413–430.Google Scholar
  45. Hansen, B.E. 1997. Inference in TAR models. Studies in Nonlinear Dynamics and Econometrics 2: 1–14.Google Scholar
  46. Hansen, B.E. 1999. Testing for linearity. Journal of Economic Surveys 13: 551–576.Google Scholar
  47. Hansen, B.E. 2000. Sample splitting and threshold estimation. Econometrica 68: 575–603.Google Scholar
  48. Hasbrouck, J. 1979. Price variability and lagged adjustment in money demand (Mimeograph). Philadelphia, PA: University of Pennsylvania.Google Scholar
  49. Hartmann, M., and H. Herwartz. 2014. Causal relations between inflation and inflation uncertainty-Cross sectional evidence in favor of the Friedman-Ball hypothesis. Economics Letters 115: 144–147.Google Scholar
  50. Hatemi-J, A. 2008. Forecasting properties of a new method to choose optimal lag order in stable and unstable VAR models. Applied Economics Letters 15 (4): 239–243.Google Scholar
  51. Hatemi-J, A. 2012. Asymmetric causality tests with an application. Empirical Economics 43: 447–456.Google Scholar
  52. Hylleberg, S., R.F. Engle, C.W.J. Granger, and B.S. Yoo. 1990. Seasonal integration and cointegration. Journal of Econometrics 44: 215–238.Google Scholar
  53. Jiang, D. 2016. Inflation and inflation uncertainty in China. Applied Economics 48 (41): 1–9.Google Scholar
  54. Jiranyakul, K., and T.P. Opiela. 2010. Inflation and inflation uncertainty in the ASEAN-5 economies. Journal of Asian Economics 21: 105–112.Google Scholar
  55. Karahan, Ö. 2012. The Relationship between Inflation and Inflation Uncertainty: Evidence from the Turkish Economy. Procedia Economics and Finance 1: 219–228.Google Scholar
  56. Kline, B. 1977. The demand for quality-adjusted cash balance: Price uncertainty in the U.S. demand for money function. Journal of Political Economy 85: 691–715.Google Scholar
  57. Komlan, F. 2013. The asymmetric reaction of monetary policy to inflation and the output gap: Evidence from Canada. Economic Modelling 30: 911–923.Google Scholar
  58. Kontonikas, A. 2004. Inflation and inflation uncertainty in the United Kingdom, evidence from GARCH modeling. Economic Modelling 21: 525–543.Google Scholar
  59. Luukkonen, R., P. Saikkonen, and T. Teräsvirta. 1988. Testing linearity against smooth transition autoregressive models. Biometrika 75: 491–499.Google Scholar
  60. Meller, B., and D. Nautz. 2012. Inflation persistence in the Euro area before and after the European Monetary Union. Economic Modelling 29: 1170–1176.Google Scholar
  61. Nasr, A.B., M. Balcilar, A.N. Ajmi, G.C. Aye, R. Gupta, and R.V. Eyden. 2015. Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model. Emerging Markets Review 24: 46–68.Google Scholar
  62. Neanidis, K.C., and C.S. Savva. 2013. Macroeconomic uncertainty, inflation and growth: Regime-dependent effects in the G7. Journal of Macroeconomics 35: 81–92.Google Scholar
  63. Nonejad, N. 2018. Has the 2008 financial crisis and its aftermath changed the impact of inflation on inflation uncertainty in member states of the European Monetary Union? Scottish Journal of Political Economy 66 (2): 1–31.Google Scholar
  64. Okun, A. 1971. The Mirage of steady inflation. Brooking Papers on Economic Activity 2: 485–498.Google Scholar
  65. Özdemir, A.Z., and M. Fisunoğlu. 2008. On the inflation-uncertainty hypothesis in Jordan, Philippines and Turkey: A long memory approach. International Review of Economics & Finance 17: 1–12.Google Scholar
  66. Qin, L., M. Sidiropoulos, and E. Spyromitros. 2013. Robust monetary policy under model uncertainty and inflation persistence. Economic Modelling 30: 721–728.Google Scholar
  67. Rahbek, A., and R. Mosconi. 1999. Cointegration rank inference with stationary regressors in VAR models. Econometrics Journal 2: 76–91.Google Scholar
  68. Reimers, H.-E. 1992. Comparisons of tests for multivariate cointegration. Statistical Papers 33 (1): 335–359.Google Scholar
  69. Su, C.W., H. Yu, H.L. Chang, and X.L. Li. 2017. How does inflation determine inflation uncertainty? A Chinese perspective. Quality & Quantity 51 (3): 1417–1434.Google Scholar
  70. Surico, P. 2007. The Fed’s monetary policy rule and U.S. inflation: The case of asymmetric preferences. Journal of Economic Dynamics & Control 31: 305–324.Google Scholar
  71. Teräsvirta, T. 1994. Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association 89: 208–218.Google Scholar
  72. Teräsvirta, T. 1998. Modelling economic relationships with smooth transition regressions. In Handbook of applied economic statistics, ed. A. Ullah and D.E.A. Giles, 507–552. New York: Marcel Dekker.Google Scholar
  73. Teräsvirta, T., D. Dijk, and M.C. Medeiros. 2005. Linear models, smooth transition autoregressions, and neural networks for forecasting macroeconomic time series: A re-examination. International Journal of Forecasting 214: 755–774.Google Scholar
  74. Thorton, J. 2007. The relationship between inflation and inflation uncertainty in emerging market economies. Southern Economic Journal 73: 858–870.Google Scholar
  75. Toda, H.Y., and T. Yamamoto. 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics 66: 225–250.Google Scholar
  76. Toda, H.Y., and P.C.B. Phillips. 1993a. The spurious effect of unit roots on vector autoregressions: An analytical study. Journal of Econometrics 59 (3): 229–255.Google Scholar
  77. Toda, H.Y., and P.C.B. Phillips. 1993b. Vector autoregressions and causality. Econometrica 61 (6): 1367–1393.Google Scholar
  78. Tong, H. 1978. On a threshold model. In Pattern recognition and signal processing, ed. C.H. Chen. Amsterdam: Sijthoff and Noordhoff.Google Scholar
  79. Tsay, R.S. 1989. Testing and modeling threshold autoregressive processes. Journal of the American Statistical Association 84: 231–240.Google Scholar
  80. Tsay, R.S. 1998. Testing and modeling multivariate threshold models. Journal of the American Statistical Association 93: 1188–1202.Google Scholar
  81. Tsong, C.-C., and C.-F. Lee. 2011. Asymmetric inflation dynamics: Evidence from quantile regression analysis. Journal of Macroeconomics 33: 668–680.Google Scholar
  82. Ungar, M., and B.-Z. Zilberfarb. 1993. Inflation and its unpredictability-theory and empirical evidence. Journal of Money, Credit and Banking 25 (4): 709–720.Google Scholar
  83. Varlik, S., V. Ulke, and H. Berument. 2017. The time-varying effect of inflation uncertainty on inflation for Turkey. Applied Economics Letters 24 (13): 961–967.Google Scholar
  84. Wilson, B.K. 2006. The links between inflation, inflation uncertainty and output growth: New time series evidence from Japan. Journal of Macroeconomics 28: 609–620.Google Scholar
  85. Yellen, J.L. 2017. Inflation, uncertainty, and monetary policy. Business Economics 52 (4): 194–207.Google Scholar
  86. Zhang, C. 2011. Inflation persistence, inflation expectations, and monetary policy in China. Economic Modelling 28: 622–629.Google Scholar

Copyright information

© The Indian Econometric Society 2019

Authors and Affiliations

  1. 1.Department of EconomicsYazd UniversityYazdIran

Personalised recommendations