are higher levels of inflation less predictable a state dependent conditional heteroscedasticity approach milton friedman proposed that there is a positive relationship between inflation and uncertainty about the future path of inflation in contrast to previous studies of this hypothesis we find strong statistical evidence that higher levels of inflation are less predictable although innovations in inflation are somewhat better predictors of future volatility than the actual level of inflation we argue that previous failures to find an inflation uncertainty relationship are due to two factors first none of the previous work directly tested friedman s hypothesis by including the level of inflation in the model of the conditional variance second these studies also used symmetric models which appears inconsistent with friedman s hypothesis our results are robust to different sample periods and to assumptions about the presence of a unit root in inflation to test the inflation uncertainty hypothesis we use state dependent models sdm s of conditional moments to estimate the time varying conditional v

why do monetary policies matter an experimental study of saving and inflation in an overlapping generations model we study experiments of an overlapping generations model where inflation is determined by the monetary policy and by the amount of average saving within each period we use a new experimental setup that allows us to observe more details of the process of expectation forming and separate this process from the actual saving process in contrast to experimental findings by lim prescott sunder marimon spear sunder and marimon sunder we find that 1 agents do not form first order adaptive expectations 2 subjects over save for precautionary reasons as a result 3 the so called friedman conjecture holds i e monetary policies which are equivalent in static equilibrium exhibit different levels and different volatility of inflation in the experiment this may generate important policy trade offs between monetary regimes we discuss our findings and relate them to current research on adaptive learning and the role it may have in ranking alternative monetary policies

source of monetary growth uncertainty and economic activity the time varying parameter model a large body of research suggests that uncertainty is an important factor affecting economic activity most earlier research however fails to consider the possibility that uncertainty may affect the value of new information and economic activity differently depending upon its source the author first examines the importance of these different sources for modeling u s monetary growth uncertainty he then empirically relates different sources of monetary growth uncertainty to economic activity measured by real gnp the results suggest that different sources of uncertainty have different impacts on economic activity the results tend to confirm predictions arising in the literature on irreversible investment and uncertainty copyright 1993 by mit press

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

the effects of inflation uncertainty on interest rates a nonlinear approach in this article we investigate the effects of inflation variability on short term interest rates within a nonlinear smooth transition regression framework the test results suggest that only the conditional mean of the inflation is a nonlinear process whereas the conditional variance is time variant but linear using the square root of conditional variance as a proxy for inflation risk we estimate fisher equation augmented with inflation risk although the estimated fisher equations suggest that inflation risk reduces short term interest rates we find that the effects of inflation risk on interest rates are regime dependent particularly we find that the negative effects of inflation variability on nominal rates are greater in low inflationary regimes when compared to high inflationary regimes on the other hand it is found that both inflation and inflation uncertainty raise the expected inflation effect

inflation and inflation uncertainty in turkey this article investigates the relationship between inflation and inflation uncertainty and the impact of monetary policy on this relationship using monthly turkish inflation data over january 1984 to october 2005 the results from various types of garch m models indicate that higher inflation rates lead to greater inflation uncertainty on the other hand the effect of inflation uncertainty on inflation is found to be negative due to stabilization motives dominating the opportunistic incentives of monetary authorities we find strong evidence to support the view that inflation oriented monetary policy has power to reduce the inflation persistence and eliminate uncertainty

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

the level and uncertainty of inflation results from oecd forecasts bryce e kanago there is considerable evidence that inflation variability and the level of inflation are positively related across countries evidence of a within county relation is mixed evidence for a significant positive relation comes mostly from studies using some survey measure contrary evidence comes mostly from studies using regression errors our measure of uncertainty is the squared forecast error from organization for economic cooperation and development inflation forecasts most countries do not exhibit a positive and significant relation the greatest number of positive coefficients is for relative uncertainty regressed on contemporaneous inflation jel e310 e370 1342 1340 1323 i introduction although empirical studies have not reached a unanimous conclusion most economists believe one detriment of high inflation is the greater uncertainty it generates about future inflation affirmative evidence of a positive relation between inflation and uncertainty is most frequently found in cross country studies that regress some measure of variability or uncertainty for each country on their average inflation rate time series regressions for individual countries provide mixed results those time series studies that derive inflation uncertainty from a survey of forecasters conclude that higher inflation causes greater uncertainty time series studies that derive uncertainty from ex post regressions constructed by researchers provide most of the negative evidence 1 it is tempting to dismiss this negative evidence as the consequence of poorly or opportunistically constructed ex post forecasts in this paper we use annual inflation forecasts for organization for economic cooperation and development oecd countries that have been published in the oecd s economic outlook for about 30 years these data circumvent the problems of constructing forecasts after the fact for each date and each country a single forecast is provided by contrast survey data such as the livingston data average the forecasts of a number of respondents to the extent that the survey sample is representative of the population the surveys may provide a better approximation to the public s expectations however survey respondents have nothing to lose if their forecasts are wildly inaccurate whereas professional forecasters put their reputation on the line a distinct advantage of the published forecasts is that the oecd provides forecasts for 24 countries whereas surveys are available for only a few countries of course ex post forecasts could be constructed for the same set of countries while these ex post forecasts could utilize modern econometrics techniques such as autoregressive conditional heteroscedasticity arch and time varying parameters they cannot replicate the specialized human capital the judgment or the particular perspective of the times that were used to construct ex ante forecasts davis and kanago 1998 regressed the squared error from ex ante inflation forecasts produced and published by business international on inflation and found no significant relation for most countries this result makes it less tempting to dismiss the time series evidence of ex post inflation forecasts we extend the results of davis and kanago 1998 by computing the same regression but using squared errors from ex ante forecasts made by the oecd and published in economic outlook the 24 countries in the oecd data include canada iceland luxembourg new zealand the united states and turkey that are not included in the business international data for some countries the oecd data includes a few more years than the business international data the results from the oecd and business international data are broadly similar few countries show a significant relation between inflation and uncertainty we further test the robustness of these results by using relative uncertainty as the dependent variable

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

permanent and temporary inflation uncertainty and investment in the united states abstract we estimate the impact on us non residential fixed investment of permanent and temporary inflation uncertainty we find that while both have a negative effect temporary uncertainty is more important for investment this study has implications for monetary policy and applied econometric practice

the euro and inflation uncertainty in the european monetary union in this paper we investigate empirically the relationship between inflation and inflation uncertainty in twelve emu countries we estimate a time varying parameter model with a garch specification for the conditional volatility of inflation in order to distinguish between short run structural and impulse and steady state uncertainty we then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the euro and its effects on the links between inflation and inflation uncertainty we find that steady state inflation has generally remained stable with the important exception of germany where the trend has become positive steady state inflation uncertainty and inflation persistence have both increased and the relationship between inflation and inflation uncertainty has broken down in many countries these findings cast doubt on the optimistic view taken by the ecb concerning its success in controlling inflation and suggest the need for improvements in its analytical framework

monetary policy and inflation uncertainty in the united states and germany friedman s 16 proposition that increased inflation uncertainty may adversely affect real economic variables has received much attention over the last decade the theoretical arguments for such real effects are compelling however the empirical evidence on their presence and magnitude in different countries is mixed most results for the postwar u s economy strongly support the proposition 28 25 26 19 24 7 whereas it is generally rejected for the german economy 23 17 8 2 while a direct comparison of the u s and german results is difficult due to a lack of uniform sample periods data definitions estimation techniques and or measures of inflation uncertainty the evidence to date nevertheless suggests that the role of inflation uncertainty differs sharply between the two countries the question then arises what factor s can explain the difference one popular explanation is that the monetary authorities in the united states and germany respond quite differently to accelerating inflation 3 so that the behavior of uncertainty differs across countries 4 the u s federal reserve is often criticized for switching frequently between the primary policy goals of price stability and full employment possibly due to political pressures 21 30 since inflation is primarily a monetary phenomenon in the long run it is likely that such stop and go policies increase the uncertainty about future steady state inflation which in turn can adversely affect real output growth by reducing overall economic efficiency the german bundesbank on the other hand is reputed for its staunch and credible commitment to price stability which often takes precedence over other policy goals a more consistent and predictable

a quantile framework for analysing the links between inflation uncertainty and inflation dynamics across countries in contrast to the conventional conditional mean approaches this study uses quantile regression techniques to present some new statistical evidence on the links between inflation uncertainty and the level of inflation with cross sectional data from 90 countries during the period 1961 to 2006 the results suggest that positive inflation shocks have stronger impact on inflation uncertainty which varies across the quantiles furthermore popular time series models are evaluated for their ability to reproduce measures of uncertainty and indicate similar results regarding the relationships between inflation and inflation uncertainty

uncertain effects of money and the link between the inflation rate and inflation uncertainty in the postwar period high rates of inflation are associated with high levels of inflation uncertainty in this paper i argue that the inflation rate and inflation uncertainty are linked by forecasters uncertainty about the impact of money growth on the price level and i present evidence indicating that this has been the case as long as the impact of money growth on the price level remains unpredictable then even predictable money growth will cause inflation uncertainty with its accompanying adverse effects on employment and output

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

inflation and wage indexation in the postwar united states this paper examines the relationship between inflation and wage indexation in the postwar united states using data on the prevalence of cost of living adjustments in major collective bargaining agreements the author finds that increases in inflation precede increases in wage indexation but reductions in inflation do not precede reductions in wage indexation there is virtually no evidence that wage indexation affects inflation copyright 1995 by mit press

relationship between inflation rate and inflation uncertainty abstract to shed further light on the possible link between inflation rate and inflation uncertainty the paper explores the relationship for us monthly inflation over 1926 to 1992 with various arfima garch type models it found that the inflation affected its uncertainty weakly negatively whereas the uncertainty affected the inflation insignificantly the results were robust to the high inflation period of the 1970s and the volatile period of 1929 to 1945 it supports engle s result that a high rate of inflation does not necessarily imply a high variance of inflation unlike friedman s view that a high rate of inflation leads to a high variance of inflation

inflation variability and gradualist monetary policy this paper considers the optimal approach to reducing inflation when the cost of inflation is its conditional variability inflation is stochastically related to money growth with unobservable time varying autonomous and induced components a sharp reduction in money growth provides information about the responsiveness of inflation to money but also induces variability as the economy heads into unknown territory gradual policy is always optimal and the model explains why moderate inflation countries adopt a much more gradual money growth reduction than high inflation countries additionally the analysis sheds light on the more general problem of learning with two unobservable parameters

interpreting the movements in short term interest rates this article uses modern asset pricing theory to examine the behavior of short term nominal interest rates over the past twenty five years the analysis investigates whether variation in the stochastic behavior of consumption growth and inflation can explain movements in the rate of interest the model estimated allows for taste shocks to utility the authors results reveal that much of the month to month movement in nominal interest rates reflects changes in the real rate and the risk premia in addition to inflationary expectations copyright 1992 by university of chicago press

discovering the link between inflation rates and inflation uncertainty a new time series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the united states the model provides several statistical measures that can be used to examine different aspects of uncertainty the main finding is that uncertainty about the long rather than short term prospects for inflation moved strongly with the rate of inflation since the early 1970s copyright 1991 by ohio state university press

are empirical measures of macroeconomic uncertainty alike there is a plethora of time series measures of uncertainty for inflation and real output growth in empirical studies but little is known whether they are comparable to the uncertainty measure reported by individual forecasters in the survey of professional forecasters are these two measures of uncertainty inherently distinct this paper shows that compared with many uncertainty proxies produced by time series models the use of real time data with fixed sample recursive estimation of an asymmetric bivariate generalized autoregressive conditional heteroskedasticity model yields inflation uncertainty estimates which resemble the survey measure there is however overwhelming evidence that many of the time series measures of growth uncertainty exceed the level of uncertainty obtained from survey measure our results highlight the relative merits of using different methods in modelling macroeconomic uncertainty which are useful for empirical researchers

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the efficacy and cost of regime shifts in inflation policies evidence from new zealand and sweden in this paper a comparative study of the regime shift in inflation policies in new zealand and sweden is performed a nonparametric regression method is used to decompose the inflation time series into three components of variation a long term trend a medium term cyclical and transient variations trend and a short term shocks component this allows study of the transition process from the high inflation characterizing the end of the 1970s and the 1980s to the low inflation observed during the 1990s it is found that in new zealand although it is initially delayed the decrease in inflation happens at a faster pace than in sweden this may indicate that reforms were more efficient in new zealand a clear link is also shown between the rising unemployment and the transition from high to low inflation furthermore while in new zealand a downward adjustment of the unemployment rate happens directly after the transition period in sweden there seems to be persistence in high unemployment

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

a theory based state dependent phillips curve and its estimation to explain the existing empirical irregularity about the slope of a phillips curve this article provides a model of imperfect competition to short that the slope of a phillips curve is shock dependent we empirically apply a state space markov switching model to examine the impact of inflation surprise on the unemployment gap resulting in the state dependent phillips curve fitting quite well our empirical evidence indicates that an unexpected monetary expansion does produce effects in reducing unemployment rates and that supply shocks should not be ignored in estimating the phillips curve because they dominate demand shocks in several nonoil shock periods jel c51 e24 e52 i introduction it is well known that a downward sloping short run phillips curve implies a trade off between the inflation rate and unemployment rate however empirical findings point out that the slope of the phillips curve depends on the selected sample periods 1 does any theoretical model explain the changes in the slope of a short run phillips curve as displayed in the data can we find empirical support for our model that implies a slope changeable phillips curve to answer these questions this article provides a theoretical model implying that the slope of the phillips curve is shock dependent we then apply a state space markov switching model to investigate the empirical support of the theoretical model although a stable negative short run phillips curve is crucial for producing inflation forecasts in policy making institutions there is no general consensus about the negative slope of the phillips curve in empirical literature 2 one of the explanations to the previous empirical irregularity as suggested by king and watson 1994 is that the relationship between unemployment and inflation is shock dependent which means that the slope of a phillips curve relies on the dominance of the demand or supply shocks therefore the conventional single equation regression based on the state independent framework is not appropriate apart from neglecting the state dependent characteristic of the phillips curve there are several other drawbacks for conventional empirical studies when investigating the phillips curve first many articles assume that forecast errors of inflation are homoscedastic which is challenged in the literature the homoscedastic assumption is debatable because several studies such as engle 1983 jansen 1989 evans 1991 and brunner and hess 1993 point out significant heteroscedasticity in the u s inflation rate arch or garch type models provide estimates of how the conditional variance of inflation varies over time within a given structure and therefore they ignore the possibility of structural changes caused by changing regimes a markov switching heteroscedasticity model is an alternative that allows regime changes in the variance structure instead of applying arch type models to estimate the time varying conditional variance of inflation within a given structure this article takes into account the influence of regime changes on inflation s variance we apply the state dependent conditional heteroscedasticity approach provided by brunner and hess 1993 and evans and wachtel 1993 to estimate the forecasting errors of inflation the second drawback is a constant natural rate assumption the unemployment gap is the difference between the unemployment rate and the natural rate conventional literature assumes a constant natural rate which is challenged theoretically and empirically as stated by gordon 1997 the existence of unionization unemployment insurance programs and labor force demographics leads to a highly persistent unemployment rate we therefore assume that the unobservable natural rate is time varying and behaves in accordance with the hysteresis of unemployment rates 3 recent empirical works of a regime switching approach on the phillips curve have focused on whether the relationship between inflation and unemployment rates is nonlinear as in ferri et al

the relationship between inflation and inflation uncertainty in the uk 1885 1998 abstract using a long series of uk inflation data i have provided strong evidence in favour of the hypothesis that inflationary periods are associated with high inflation uncertainty this result supports the friedman ball hypothesis and has important implications for the inflation output relationship provided that more inflation uncertainty leads to lower output

unobserved component time series models with markov switching heteroscedasticity changes in regime and the link between inflation rates and inflation uncertainty in this article i first extend the standard unobserved component time series model to include hamilton s markov switching heteroscedasticity this will provide an alternative to the unobserved component model with autoregressive conditional heteroscedasticity as developed by harvey ruiz and sentana and by evans and wachtel i then apply a generalized version of the model to investigate the link between inflation and its uncertainty u s data gross national product deflator 1958 1 1990 4 i assume that inflation consists of a stochastic trend random walk component and a stationary autoregressive component following ball and cecchetti and a four state model of u s inflation rate is specified by incorporating regime shifts in both mean and variance structures i analyze the interaction of mean and variance over long and short horizons the empirical results show that inflation is costly because higher inflation is associated with higher long run uncertainty

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

quasifundamental variation in the price level and the inflation rate abstract this paper describes a class of overlapping generations economies that have quasifundamental qf equilibria equilibria in which the price level and inflation rate are positively correlated with a fundamental random variable despite the existence of an alternative pareto dominant equilibrium in which the price level and or inflation rate are constant in qf equilibria the inflation rate is excessively variable using either quantitative or welfare based variability measures these equilibria also provide rational expectations adjustment processes under which the low inflation monetary steady state is dynamically stable journal of economic literature classification numbers e31 e32 e41

inflation uncertainty and labour market conditions in the us recent inflation dynamics in the united states us questioned the role of driving forces of inflation in the long run although the us recorded one of the longest economic recovery periods and the

rounding error a distorting influence on index data rounding error is an important source of measurement error that is common in index data the problem can be traced to rounding that occurs to limit the number of digits after the decimal place to be reported in rebased index data rounding error introduces distortions that affect variance properties alter the lag distributions of time series models and cause a systematic bias in estimated coefficients for instance spuriously choppy inflation rates are obtained when constructed using the official cpi rebased with 1982 84 100 fortunately the distortions can be generally avoided by using versions of data that have greater precision

market discipline by thrift depositors this paper tests for the presence of depositor discipline by examining the effect of depository institutions risk on the pricing and growth of uninsured deposits the study analyzes a large panel of thrifts that includes detailed information on interest rate schedules this information allows the authors to develop a time consistent risk profile for thrifts their empirical findings support the presence of market discipline riskier banks are found to pay higher interest rates but attract smaller amounts of uninsured deposits the authors also find that qualitative results are similar for fully insured deposits although statistical significance is substantially lower

inflation and real growth some empirical results what is the relationship between the average rate of inflation and the variability of real economic growth recent studies by gordon 3 okun 7 logue and willett 6 klein 5 and jaffee and kleiman 4 have attempted to f1ll some of the gaps in our knowledge of inflation s effect on the economy these studies have generally demonstrated the positive empirical relationship between the rate of inflation and its variability or unpredictability such heightened uncertainty may produce greater variability of real growth which in turn undoubtedly increases welfare costs using annual data for twenty four countries we elnd a positive relationship between the mean inflation rate and the variability of real economic growth this finding strengthens the commonly held belief that inflation is undesirable on welfare grounds

causality between inflation and real growth abstract the paper investigates inflation growth causality over 1947 2005 with varma ml asymmetric vgarch the results imply that one uncertainty affects positively its level and much less negatively the other level whereas one level influences positively both uncertainties friedman s hypothesis was not strongly rejected

real and nominal interest rates under uncertainty the fisher theorem and the term structure this paper examines the relation between nominal and real interest rates and the nominal and real term structure under uncertainty we show that two separate risk terms cause the fisher theorem to fail one risk term is related only to the variability of money prices while the other is related to the purchasing power riskiness of the nominal bond monetary policy can affect the value of both these risk terms we also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia even if the economy is neutral with respect to monetary policy monetary policy can alter the nominal term structure

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations

modelling multi period inflation uncertainty using a panel of density forecasts this paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the survey of professional forecasters spf based on a dynamic heterogeneous panel data model we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest in addition the strong link between past forecast errors and current forecast uncertainty as often noted in the arch literature is largely lost in a multi period context with varying forecast horizons we propose a novel way of estimating news and its variance using the kullback leibler information and show that the latter is an important determinant of forecast uncertainty our evidence suggests a strong relationship of forecast uncertainty with level of inflation but not with forecaster discord or with the volatility of a number of other macroeconomic indicators copyright 2006 john wiley sons ltd