On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies |
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| Institution: | 1. Department of Economics, Heidelberg University, Bergheimer Straße 58, 69115 Heidelberg, Germany;2. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt am Main, Germany;1. Baugh Center for Entrepreneurship & Free Enterprise, Baylor University, USA;2. Department of Economics, Clemson University, USA;1. Wake Forest University, USA;2. Saint Louis University, USA;1. Department of Economics and Business Economics, Aarhus University, Denmark;2. PeRCent, CESifo, CEPR, IZA;1. Department of Economics, Appalachian State University, Boone, NC 28608, USA;2. Department of Economics, West Virginia University, Morgantown, WV 26501, USA;1. Universidad Del Pacífico, Peru;2. Department of Business Administration, Pontificia Universidad Javeriana, Colombia |
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| Abstract: | Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility. |
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| Keywords: | Inflation uncertainty Central banking Spline-GARCH E58 E65 E31 |
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