The Inflation-Uncertainty Nexus: New Evidence From Stochastic Volatility Models

Abstract

The purpose of this study is to examine the inflation and inflation uncertainty nexus for nine emerging and three developed market economies using more realistic and flexible inflation uncertainty measures based on seven different stochastic volatility (SV) models. In that regard, we first utilize a log predictive score to determine the most appropriate SV model for each economy examined, and then analyse the causality relationship between inflation and inflation uncertainty. Contrary to general findings in the related literature, the results provide strong and robust evidence that inflation uncertainty has a positive and statistically significant impact on the inflation rates for both the emerging and developed countries examined.