Inflation and Inflation Volatility Revisited

Dong Hyeon Kim, Shu Chin Lin

Research output: Contribution to journalArticle

9 Citations (Scopus)

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 languageEnglish
Pages (from-to)327-345
Number of pages19
JournalInternational Finance
Volume15
Issue number3
DOIs
Publication statusPublished - 2012 Dec

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Finance

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