On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies
European Journal of Political Economy, Forthcoming. A preliminary version of this paper circulated under the title "Cross-Sectional Evidence on the Relation between Macroeconomic Conditions, Stock Market Volatility, Monetary Policy, and Low-Frequency Inflation Uncertainty".
48 Pages Posted: 18 Oct 2014 Last revised: 24 Sep 2018
Date Written: August 31, 2018
Abstract
Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.
Keywords: Inflation uncertainty, Central banking, Spline-GARCH
JEL Classification: E58, E65, E31
Suggested Citation: Suggested Citation