Time‐Varying Relationship between Inflation and Inflation Uncertainty

42 Pages Posted: 2 Jun 2020

See all articles by Chenghan Hou

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies

Date Written: February 2020

Abstract

This paper investigates whether the relationship between inflation and inflation uncertainty has changed and whether the change in this relationship has been gradual or abrupt. We extend the time‐varying parameter with stochastic volatility in mean model (TVP‐SVM) to include a mixture innovation disturbance in the time‐varying parameter process. The proposed model produces more reliable estimates and allows us to investigate the occurrence of breaks in the gradually evolving process of the time varying coefficients. Using data of US, Germany, Canada, New Zealand, UK, France, Italy, Spain and Australia, we find that: (i) the relationship between inflation and inflation uncertainty substantially varies over time; (ii) there is strong support for the existence of abrupt changes in the US inflation–inflation uncertainty relationship; (iii) our empirical results of Canada and New Zealand show that the correlation between inflation and inflation uncertainty has been much weaker since early 1990s, which coincides with the timing of the implementation of inflation targeting.

Suggested Citation

Hou, Chenghan, Time‐Varying Relationship between Inflation and Inflation Uncertainty (February 2020). Oxford Bulletin of Economics and Statistics, Vol. 82, Issue 1, pp. 83-124, 2020, Available at SSRN: https://ssrn.com/abstract=3615240 or http://dx.doi.org/10.1111/obes.12327

Chenghan Hou (Contact Author)

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

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