INFLATION IN OUR WORLD
Dec. 31st 10:38 AM 2009
There has been a growing trend in research on the relationship between inflation andinflation uncertainty. Despite using a variety of approaches to measure uncertainty,
researchers only reach a hesitant conclusion as to whether higher inflation promotes or
retards inflation uncertainty. Empirical investigations by Fischer (1993), Kormendi and
Meguire (1995), De Gregoio (1992, 1993) and Smyth (1992) found that inflation
uncertainty was relatively lower in economies with low inflationary rates. It was concluded
that inflation uncertainty increases mainly when monetary policy changes. In contrast,
Andras’ (1997) empirical result is inconclusive on the relationship between inflation and
inflation uncertainty. Studies have also shown that the relationship between the rate of
inflation and its variability tends to break down when the sample is disaggregated into
subgroups. For example, cross section analysis by Logue and Willet (1976) reveals that the
relationship breaks down for countries that have moderate inflation. This suggests the
existence of a “threshold level†of inflation rate below which the positive level variability
relationship ceases to hold.
