Inflation Volatility and the Directional Volatility Ratio

48 Pages Posted: 29 Feb 2024

See all articles by Alfredo García-Hiernaux

Alfredo García-Hiernaux

Universidad Complutense de Madrid (UCM) - Instituto Complutense de Análisis Económico | ICAE

Maria T. Gonzalez-Perez

Bank of Spain

David E. Guerrero

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Date Written: October 14, 2023

Abstract

This paper proposes a semiparametric model to estimate inflation volatility under rational inattention and introduces a new inflation risk measure: the directional volatility ratio. We estimate inflation trends and volatility in Germany, France, Spain, the Eurozone, and the USA from January 2002 to July 2023. Our volatility measure outperforms standard inflation volatility forecasting methodologies and relates to subjective inflation volatility. The directional volatility ratio significantly relates to the inflation trend dynamics, foreseeing likely inflation trends and turning points. We recommend using inflation total and directional volatility to monitor and forecast inflation trend dynamics.

Keywords: Inflation Trend, Inflation volaitlitiy, Rational inattention, semivolatilities, directional volatility ratio

JEL Classification: C22, C32, E3, E4, E5

Suggested Citation

García-Hiernaux, Alfredo and Gonzalez-Perez, Maria T. and Guerrero, David E., Inflation Volatility and the Directional Volatility Ratio (October 14, 2023). Available at SSRN: https://ssrn.com/abstract=4724237 or http://dx.doi.org/10.2139/ssrn.4724237

Alfredo García-Hiernaux

Universidad Complutense de Madrid (UCM) - Instituto Complutense de Análisis Económico | ICAE ( email )

Pozuelo, MADRID 28260
Spain

Maria T. Gonzalez-Perez (Contact Author)

Bank of Spain ( email )

Calle Alcala, 48
Madrid, 28014
Spain
+34 913388587 (Phone)

David E. Guerrero

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

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