On inflation and inflation uncertainty in the G7 countries

The relationship between inflation and inflation uncertainty is investigated in the G7 countries from 1948 to 1993. GARCH models are used to generate a measure of inflation uncertainty and then Granger methods are employed to test the causality between average inflation and inflation uncertainty. In all G7 countries, inflation significantly raises inflation uncertainty as predicted by Friedman and Ball. Weaker evidence is found that inflation uncertainty Granger-causes inflation. In three countries (US, UK and Germany) increased inflation uncertainty lowers inflation while in two countries (Japan and France) increased inflation uncertainty raises inflation.