|
Understanding the dynamics of inflation is a difficult task. Most of the attention has
been devoted to the (conditional) mean of inflation (Altinok et al., 2009). As the rate of inflation increases as a result of central banks' policy setting, not only the level of inflation
but also the volatility of inflation becomes important to monitor. Modeling volatility in
the stock market is of interest (French and Roll, 1986; Foster and Viswanathan, 1990 and
1993; Mookerjee and Yu, 1999; and Franses and Paap, 2000), and following Berument and
Sahin (2009), this paper analyzes the seasonal movements in inflation uncertainty for a big
open economy, the US.
The adverse effect of inflation has been documented in the literature. Hafer (1986)
and Holland (1986) have elaborated the negative effect of inflation uncertainty on
employment. Friedman (1977), Froyen and Waud (1987), and Holland (1988) have reported the
negative effect of inflation volatility on output. Chan (1994) and Berument (1999) have argued
that inflation volatility increases interest rates.
However, there are a limited number of studies that explain the behavior of
inflation volatility with various economic and political factors. Aisen and Veiga
(2006) argue that inflation volatility increases with higher degree of political instability, ideological
polarization and political fragmentation. Smith (1999) and Engel and Rogers (2001) claim that
inflation volatility increases with exchange rate volatility. Dittmar et al. (1999), Gavin (2003) and Berument and Yuksel (2007) link inflation volatility to inflation targeting regimes, and
Grier and Perry (1998), Kontonikas (2002) and Berument and Dincer (2005) link inflation
volatility to higher inflation. |
