Abstract
The link between inflation and its variability has been a topic of considerable interest and dispute, with theoretical disagreements and inconclusive empirical results. Empirical problems often arise from endogeneity and reverse causality. This paper reassesses the link through a system of simultaneous equations that addresses the reverse causality issue. Employing the identification through heteroskedasticity approach as an identification strategy and using a panel of 105 countries over the period 1960-2007, we find a two-way interaction between inflation and its variability. In particular, higher inflation increases inflation volatility, which is in line with the Friedman-Ball Hypothesis. Consistent with the Cukierman-Meltzer arguments, moreover, greater inflation volatility fuels inflation. The evidence is robust to alternative model specifications, time periods, and country characteristics.
| Original language | English |
|---|---|
| Pages (from-to) | 327-345 |
| Number of pages | 19 |
| Journal | International Finance |
| Volume | 15 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2012 Dec 1 |
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ASJC Scopus subject areas
- Geography, Planning and Development
- Development
- Finance
Cite this
Inflation and Inflation Volatility Revisited. / Kim, Dong-Hyeon; Lin, Shu Chin.
In: International Finance, Vol. 15, No. 3, 01.12.2012, p. 327-345.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Inflation and Inflation Volatility Revisited
AU - Kim, Dong-Hyeon
AU - Lin, Shu Chin
PY - 2012/12/1
Y1 - 2012/12/1
N2 - The link between inflation and its variability has been a topic of considerable interest and dispute, with theoretical disagreements and inconclusive empirical results. Empirical problems often arise from endogeneity and reverse causality. This paper reassesses the link through a system of simultaneous equations that addresses the reverse causality issue. Employing the identification through heteroskedasticity approach as an identification strategy and using a panel of 105 countries over the period 1960-2007, we find a two-way interaction between inflation and its variability. In particular, higher inflation increases inflation volatility, which is in line with the Friedman-Ball Hypothesis. Consistent with the Cukierman-Meltzer arguments, moreover, greater inflation volatility fuels inflation. The evidence is robust to alternative model specifications, time periods, and country characteristics.
AB - The link between inflation and its variability has been a topic of considerable interest and dispute, with theoretical disagreements and inconclusive empirical results. Empirical problems often arise from endogeneity and reverse causality. This paper reassesses the link through a system of simultaneous equations that addresses the reverse causality issue. Employing the identification through heteroskedasticity approach as an identification strategy and using a panel of 105 countries over the period 1960-2007, we find a two-way interaction between inflation and its variability. In particular, higher inflation increases inflation volatility, which is in line with the Friedman-Ball Hypothesis. Consistent with the Cukierman-Meltzer arguments, moreover, greater inflation volatility fuels inflation. The evidence is robust to alternative model specifications, time periods, and country characteristics.
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UR - http://www.scopus.com/inward/citedby.url?scp=84874377537&partnerID=8YFLogxK
U2 - 10.1111/j.1468-2362.2013.12001.x
DO - 10.1111/j.1468-2362.2013.12001.x
M3 - Article
AN - SCOPUS:84874377537
VL - 15
SP - 327
EP - 345
JO - International Finance
JF - International Finance
SN - 1367-0271
IS - 3
ER -