On the Nonlinear Causality between Inflation and Inflation Uncertainty in the G3 Countries

Journal of Applied Economics, Vol. 14, No. 2, pp. 269-296, November 2011

30 Pages Posted: 18 Nov 2011

See all articles by Mehmet Balcilar

Mehmet Balcilar

University of New Haven

Zeynel Abidin Ozdemir

Economic Research Forum (ERF); IZA Institute of Labor Economics

Esin Cakan

University of New Haven - Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2010

Abstract

This study examines the dynamic relationship between monthly inflation and inflation uncertainty in Japan, the US and the UK by employing linear and nonlinear Granger causality tests for the 1957:01-2006:10 period. Using a generalised autoregressive conditional heteroskedasticity (GARCH) model to generate a measure of inflation uncertainty, the empirical evidence from the linear and nonlinear Granger causality tests indicate a bi-directional causality between the series. The estimates from both the linear vector autoregressive (VAR) and nonparametric regression models show that higher inflation rates lead to greater inflation uncertainty for all countries as predicted by Friedman (1977). Although VAR estimates imply no significant impact, except for Japan, nonparametric estimates show that inflation uncertainty raises average inflation in all countries, as suggested by Cukierman and Meltzer (1986). Thus, inflation and inflation uncertainty have a positive predictive content for each other, supporting the Friedman and Cukierman-Meltzer hypotheses, respectively.

Keywords: inflation, inflation uncertainty, Granger-causality, nonlinear Granger-causality

JEL Classification: C22, E31

Suggested Citation

Balcilar, Mehmet and Ozdemir, Zeynel Abidin and Cakan, Esin, On the Nonlinear Causality between Inflation and Inflation Uncertainty in the G3 Countries (August 23, 2010). Journal of Applied Economics, Vol. 14, No. 2, pp. 269-296, November 2011 , Available at SSRN: https://ssrn.com/abstract=1961240

Mehmet Balcilar

University of New Haven ( email )

300 Boston Post Road
West Haven, CT 06516
United States

HOME PAGE: http://www.mbalcilar.net

Zeynel Abidin Ozdemir

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Esin Cakan (Contact Author)

University of New Haven - Economics ( email )

300 Boston Post Road
West Haven, CT 06516
United States

HOME PAGE: http://www.newhaven.edu/Faculty-Staff-Profiles/Esin-Cakan/

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