How does inflation determine inflation uncertainty? A Chinese perspective

How does inflation determine inflation uncertainty? A Chinese perspective Using a bootstrap Granger full-sample causality test and a sub-sample rolling window estimation, this paper examines the causal link between inflation and inflation uncertainty in China. The results show that high inflation leads to high inflation uncertainty, supporting Friedman-Ball’s hypothesis (1992) and Holland’s theory (J Money Credit Bank 27:827–837, 1995). Furthermore, significant feedback exists from inflation uncertainty to inflation in some periods, supporting Holland’s theory (J Money Credit Bank 27:827–837, 1995) that inflation uncertainty has a negative effect on inflation. We find that the relationship between inflation and inflation uncertainty varies across time. The Chinese monetary authority needs to ensure a quick and effective policy response to inflation development because doing so will help reduce inflation, eliminate many of the costs associated with high inflation and therefore minimize the marginal effect of inflation on inflation uncertainty. However, quantitative tools for China’s monetary policy are also warranted. In the long term, the importance of keeping inflation low, stable, and predictable cannot be overemphasized. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Quality & Quantity Springer Journals

How does inflation determine inflation uncertainty? A Chinese perspective

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Publisher
Springer Netherlands
Copyright
Copyright © 2016 by Springer Science+Business Media Dordrecht
Subject
Social Sciences; Methodology of the Social Sciences; Social Sciences, general
ISSN
0033-5177
eISSN
1573-7845
D.O.I.
10.1007/s11135-016-0341-2
Publisher site
See Article on Publisher Site

Abstract

Using a bootstrap Granger full-sample causality test and a sub-sample rolling window estimation, this paper examines the causal link between inflation and inflation uncertainty in China. The results show that high inflation leads to high inflation uncertainty, supporting Friedman-Ball’s hypothesis (1992) and Holland’s theory (J Money Credit Bank 27:827–837, 1995). Furthermore, significant feedback exists from inflation uncertainty to inflation in some periods, supporting Holland’s theory (J Money Credit Bank 27:827–837, 1995) that inflation uncertainty has a negative effect on inflation. We find that the relationship between inflation and inflation uncertainty varies across time. The Chinese monetary authority needs to ensure a quick and effective policy response to inflation development because doing so will help reduce inflation, eliminate many of the costs associated with high inflation and therefore minimize the marginal effect of inflation on inflation uncertainty. However, quantitative tools for China’s monetary policy are also warranted. In the long term, the importance of keeping inflation low, stable, and predictable cannot be overemphasized.

Journal

Quality & QuantitySpringer Journals

Published: Apr 11, 2016

References

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