Evidence of a Nonlinear Relationship between Inflation and Inflation Uncertainty: the case of the Four Little dragons
Resource
Journal of Policy Modeling, 30(2), 363-376
Journal
Journal of Policy Modeling
Pages
363-376
Date Issued
2007
Date
2007
Author(s)
沈中華
Abstract
Using a nonlinear flexible regression model for four economies in east Asia, we re-examine two hypotheses in light of the causal relationship between inflation and inflation uncertainty. The first, proposed by Friedman [Friedman, M. (1977). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85, 451-472], postulates that increased inflation raises inflation uncertainty. Conversely, the second, put forth by Cukierman and Meltzer [Cukierman, A., & Meltzer, A. (1986). a theory of ambiguity, credibility, and inflation under discretion and asymmetric information. Econometrica, 54, 1099-1128], propounds that a high level of inflation uncertainty leads to a higher rate of inflation. Here, except for Hong Kong, overwhelming statistical evidence is found in favor of Friedman's hypothesis. The nonlinearity displays a U-shaped pattern, strongly implying that, indeed, a high rate of inflation or deflation results in high inflation uncertainty. At the same time, however, convincing evidence is found for Cukierman-Meltzer's hypothesis in favor of all four economies. Although Taiwan has an inverted U-shape, Hong Kong, Singapore and South Korea show a positive relation, thus agreeing with Cukierman-Meltzer's hypothesis. © 2007 Society for Policy Modeling.
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Type
journal article
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