Inflation and Inflation Uncertainty in the G-7 Countries

Abstract

This study examines the relationship between inflation and inflation uncertainty in the G-7 countries for the period from 1957 to 2001. The causality between the inflation and inflation uncertainty is tested by using the Full Information Maximum Likelihood Method with extended lags. Our results suggest that inflation causes inflation uncertainty for all the G-7 countries, while inflation uncertainty causes inflation for Canada, France, Japan, the UK and the US. Furthermore, we find that in four countries (Canada, France, the UK and the US) increased uncertainty lowers inflation, and in only one country (Japan), increased uncertainty raises inflation.

Keywords: Inflation Uncertainty, GARCH Models, Monetary Policy

JEL Classification: E20, F41, F47