European time-series relationships between inflation and inflation uncertainty: In search of threshold levels

Summary Cross-country studies have found threshold levels of inflation below which the relationship between inflation and inflation uncertainty appears to break down. However, Ball's (1992) theory suggests that threshold levels should be studied in a time-series context. This study documents these threshold levels. For this purpose, the conditional variance of inflation is modeled as a GARCH process that includes not only lagged squared residuals and conditional variance estimates but also a predetermined inflation variable. A two-step procedure is used to identify the ranges of this inflation variable that determine the significance of its coefficient. Empirical results are presented for the four West European G-7 countries: Italy, Germany, the UK, and France.The second author appreciates financial support by The Netherlands Organization for Science Research (N.W.O.). The authors thank Eduard Bomhoff, the editor and two anonymous referees for their useful comments and suggestions.