Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model

Nasr, Adnen Ben; Balcılar, Mehmet; Ajmi, Ahdi Noomen; Aye, Goodness C.; Gupta, Rangan; Eyden, Reneé van

doi:10.1016/j.ememar.2015.05.003

Cited by 19 publications

(19 citation statements)

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“…Empirical works have been extended to the case of both advanced and developing countries (e. g., Daal et al, 2005;Chen et al, 2008 andNasr et al, 2015). These studies provide strong evidence supporting the Friedman-Ball hypothesis mainly for developing countries.…”

Section: Introductionmentioning

confidence: 93%

The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression

Jiranyakul

2020

SSRN Journal

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Using monthly data from 1979M1 to 2019M12, this paper employs the AR(p)-EGARCH model and quantile regression to examine the linkages between inflation and inflation uncertainty in nine Asian countries. The results show that inflation positively causes inflation uncertainty in all economies regardless whether economies are inflation or non-inflation targeting. The Friedman-Ball hypothesis is thus supported. In addition, inflation uncertainty positively causes inflation in most economies. Therefore, the Cukierman-Meltzer hypothesis.is likely to be supported. The findings signal the possibility of the real cost of inflation for these economies.

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Section: Introductionmentioning

confidence: 93%

The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression

Jiranyakul

2020

SSRN Journal

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“…Nasr et al . () uses a more complex approach to assess the inflation–uncertainty nexus. Based on a seasonal fractionally integrated smooth transition autoregressive asymmetric power GARCH and a conditional Gaussian Markov switching vector autoregressive (MS‐VAR) model framework, the authors provide evidence in favor of the Friedman–Ball hypothesis for South Africa, over the period from 1921:01 to 2012:12.…”

Section: Empirical Literature On the Inflation–uncertainty Nexusmentioning

confidence: 99%

Time–frequency relationship between US inflation and inflation uncertainty: evidence from historical data

Albulescu

Tiwari

Miller

et al. 2019

Scottish J Political Eco

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We provide new evidence on the relationship between inflation and its uncertainty in the United States on an historical basis, covering the period from 1775 to 2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and compare the results with the Stock and Watson (2007) and Chan (2015) methods. Second, we employ the wavelet methodology to analyze the comovements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium and long runs, the Freidman-Ball hypothesis holds with a bounded measure of uncertainty, while if the Stock and Watson (2007) measure of uncertainty is used, the Cukierman-Meltzer reasoning prevails. Therefore, the findings are sensitive to the way inflation uncertainty is computed. Second, we discover mixed evidence about the inflation-uncertainty nexus in the short run, findings that explain the mixed results reported to date in the empirical literature.inflation precedes greater uncertainty in some periods. In this situation, however, the monetary authority contracts the money supply growth rate to control welfare loses, which causes inflation to fall.Although they differ in the direction of causality, the above-mentioned hypotheses all received validation by empirical studies. The mixed results documented by the empirical literature reflect differences in methodologies (linear or non-linear models), in the measures of inflation uncertainty (see Cukierman and Meltzer, 1986), or in the time horizon for the inflation expectations (see Pourgerami and Maskus, 1987).Against this background and to shed further light on the relationship between inflation and its uncertainty, we make four contributions to the existing literature. First, given the validation of different competing hypothesis by previous studies, we posit a non-linear link between the inflation rate and its uncertainty. Indeed, Kim (1993) shows that regime switching may provide the key element in explaining inflation uncertainty. Hypothesizing a high and low inflationary regime, however, seems too simplistic and arbitrary. Moreover, a strict focus on the time domain ignores the importance of the frequency-varying properties of inflation and its uncertainty. Fluctuations in the time profile of inflation uncertainty may differently affect policy decisions and consumers' behavior in the short run, compared with the long run (Barerro et al., 2017). In addition, common models assume stationary time series, which is not always the case. Therefore, to address these limitations, we propose a new analysis based on the wavelet method that combines the frequency and time domains. As far as we know, Bouoiyour and Selmi (2014) wrote the only paper that investigates the inflation-uncertainty nexus using the Maximal Overlap Discrete Wavelet Transform (MODWT) and a series of non-linear causality tests for Egypt. Our study differs in that we employ the Cont...

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“…Estimates made on the Canada's, the Euro area's, US's, UK's, and Germany's data provide confirmation that money growth really gives warning signals of a switch of the inflation regime from low to high and vice versa (Amisano & Fagan, 2010). Besides that, five years later Nasr, Balcilar, Ajmi et al (2015) showed a positive determinant effect between the inflation and inflation uncertainty, employing MS-VAR model, but Granger test confirmed the causality only from inflation to inflation uncertainty (Nasr et al, 2015). Therefore, inflation can be driven by its own past volatility, not exceptionally by other factors such as broad money or the key policy rate.…”

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confidence: 86%

“…Over and above, Markov switching models are widely used for various types of the estimations including inflation volatility (Davig & Doh, 2009;Amisano & Fagan, 2010;Nasr et al, 2015), sustainability of the current account (Bazhenova, 2018), corporate yield spreads (Dionne et al, 2011), and modelling the impact of changing monetary regimes on the financial and economic development of transition economies (Lukianenko & Zhuk, 2011) etc.…”

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confidence: 99%

Inflation Expectations Modeling: The Application of Markov Switching Autoregression

Lukianenko

Nasachenko

2020

spne

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The shift of the monetary policy framework in Ukraine has led to the transformation of the power of the key transmission channels. Inflation targeting (IT) assumes the interest rates channel as the main one; besides that, since the exchange rate is floating, the influence from the key policy rate change on it is stronger and more effective. Implementation of the IT at the end of 2016 significantly affected the prices; in particular, the inflation has slowed down from almost 60 % in the corresponding month of the previous year to 2.3 % in 2020. Specifically, the interaction between the key policy rate, which is the main monetary policy instrument under the IT, consumer prices, and economic growth has changed. One of the important channels is the inflation expectations channel that became influential after IT has started. Consequently, the article is aimed to investigate how inflation expectations are dependent on the inflation dynamics, the key policy rate changes, and the index of the real wage fluctuations applying Markov switching autoregression model with two regimes, which is widely used to estimate the effects of economic crisis, break of the trend, and instability. The developed model consists of two equations, one of which defines a regime with the high volatility, and the other with the low. The obtained results show the dominance of the high volatility regime during almost all the research period because of essential inflation uncertainty and the overall unstable situation in the country caused by the crisis. Additionally, probability to stay in the first regime is much higher than in the second and is equal to 91 %. Outcomes from the modelling allow to judge about the future inflation and inflation expectations dynamics based on discovered new features. The further steps in the evaluation of effects of monetary policy regimes shift are expansion of the model to three-or four-regime switch (high, low, moderate volatility, etc.), the use of additional independent variables, experiments with the key policy rate, and inflation as dependent variables.

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Causality between inflation and inflation uncertainty in South Africa: Evidence from a Markov-switching vector autoregressive model

Cited by 19 publications

References 54 publications

The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression

The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression

Time–frequency relationship between US inflation and inflation uncertainty: evidence from historical data

Inflation Expectations Modeling: The Application of Markov Switching Autoregression

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