OninflationandinflationuncertaintyintheG7countries.pdfVIP

Journal of International Money Journal of International Money and Finance and Finance ELS EV IER 17 (1998) 671-689 On inflation and inflation uncertainty in the G7 countries Kevin B. Griera, Mark J. Perryb?* aDivisi6nde Economia, CIDE, Carretera Mico Toluca, Col. Lomas de Sta. Fe, Mico D.F. 01210, Mexico bDepadment of Economics, University of Michigan-Flint, Flint, MI 48502-2186, USA Abstract The relationship between inflation and inflation uncertainty is investigated in the G7 countries from 1948 to 1993. GARCH models are used to generate a measure of inflation uncertainty and then Granger methods are employed to test for causality between average inflation and inflation uncertainty. In all G7 countries, inflation significantly raises inflation uncertainty as predicted by Friedman and Ball. Weaker evidence is found that inflation uncertainty Granger-causes inflation. In three countries (US, UK and Germany) increased inflation uncertainty lowers inflation while in two countries (Japan and France) increased inflation uncertainty raises inflation. 0 1998 Elsevier Science Ltd. All rights reserved. Keywords: Inflation; Inflation uncertainty; GARCH models; Monetary policy; Central banking 1. Introduction The cost of inflation is a subject that has long troubled macroeconomists. While surprise inflation redistributes wealth, it is difficult to show significant welfare losses from moderate, predictable inflations. Yet inflation is extremely unpopular *Corresponding author. Tel.: + 1 810 7623191; fax: + 1 810 7623687; e-mail: mjperry@ For example Cooley and Hansen (1991) find the welfare cost of moderate inflation so sm