Sains Malaysiana 36(2): 225-232 (2007)

On the Relationship between Inflation Rate and Inflation Uncertainty:

An Application of the GARCH Family Models

(Hubungan antara Kadar Inflasi dan Kemeruapan Inflasi:

Satu Aplikasi Model Keluarga GARCH)

Abu Hassan Shaari Mohd Nor, Tan Yan Ling,

Pusat Pengajian Ekonomi, Fakulti Ekonomi dan Perniagaan

UKM, Bangi 43600 Selangor, Malaysia

Fauziah Maarof

Jabatan Matematik, Fakulti Sains, Universiti Putra Malaysia

43400, Serdang, Selangor, Malaysia

Received: 10 December 2006 / Accepted: 25 February 2007

ABSTRACT

The main objective of this paper is to explore the varying volatility dynamic of inflation rate in Malaysia for the period from January 1980 to December 2004.  The GARCH, GARCH-Mean, EGARCH and EGARCH-Mean models are used to capture the stochastic variation and asymmetries in the economic instruments. Results show that the EGARCH model gives better estimates of sub-periods volatility. Further analysis using Granger causality test show that there is sufficient empirical evidence that higher inflation rate level will result in higher future inflation uncertainty and higher level of inflation uncertainty will lead to lower future inflation rate.

Keywords: GARCH; Granger Causality; inflation rate; volatility dynamic

ABSTRAK 

Tujuan utama makalah  ini adalah untuk menyajikan satu kajian empirikal tentang ciri kemeruapan dinamik kadar inflasi di Malaysia bagi tempoh Januari 1980 hingga Disember 2004. Model GARCH, GARCH-Mean, EGARCH and EGARCH-Mean digunakan untuk menganggar variansi stokastik dan asimetrik dalam pembolehubah ekonomi tersebut. Keputusan kajian menunjukkan bahawa model EGARCH memberikan keputusan penganggaran kemeruapan sub tempoh yang baik.  Analisis lanjutan menggunakan ujian kausaliti Granger memberikan bukti empirikal bahawa aras inflasi yang tinggi  pada masa kini berkecenderungan membawa kepada ketidakpastian inflasi yang tinggi padamasa akan datang dan aras ketidakpastian inflasi yang tinggi pada masa kini  pula akan mengurangkan kadar inflasi akan datang.

Kata kunci: GARCH; kausaliti Granger; kadar inflasi; kemeruapan dinamik

REFERENCES/RUJUKAN

Ball, L. 1992. Why does inflation raise inflation uncertainty? Journal of Monetary Economics 29(3) : 371-388.

Berument, H., Metin-Ozcan.,K. & Neyapti, B. 2001. Modelling inflation uncertainty using EGARCH: An application to Turkey. Federal Reserve Bank of Louis Review 66: 15-26.

Bollerslev, T. 1986. Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics 31: 307-327.

Bollerslev, T., Engle R.& Nelson, D.B.  1994. ARCH Models, in R.F. Engle and D.L. McFadden (eds.). Handbook of Econometrics. Vol. IV, Elsevier Science B.V.

Cukierman, A & Meltzer, A. 1986. A Theory of ambiguity, credibility, and inflation under discretion and asymmetric information. Econometrica 54: 1099-1128.

Eagle, R. 1983. Estimates of the variance of US inflation based upon the ARCH model. Journal of Money, Credit and Banking 15: 286-301.

Fernandez Valdovinos, C. 2001. Further evidence Friedman’s hypothesis: The case of Paraguay. Cuadernos de economia V38 N115.

Friedman, M. 1977. Nobel lecture: Inflation and unemployment. Journal of Political Economy 85: 451-472.

Fountas, S., Ioannidis, A. & Karanasos, M. 2004. Inflation, inflation uncertainty, and a common European monetary policy. The Manchester School. 72: 221-242.

Holland, S. 1995. Inflation and uncertainty: Tests for temporal ordering. Journal of Money, Credit, and Banking 27: 827-837.

Karanasos, M., Karanassou, M.& Fountas, S. 2004. Analyzing US inflation by a GARCH model with simultaneous feedback. WSEAS Transactions on Information Science and Applications 1: 767-772.

Kontonikas, A. 2004. Inflation and inflation uncertainty in the United Kingdom, evidence GARCH modelling. Economic Modelling 21: 525-543.

Nas, T. F. & Perry, M. J. 2000. Inflation, inflation uncertainty, and monetary policy in Turkey: 1960–1998. Contemporary Economic Policy 18: 170–80.

Nelson, D.B. 1991. Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica 59: 347–370.

Sill, K. 1994. Money, output, and the cyclical volatility of the term structure. Federal Reserve Bank Of Philadelphia Working Paper 94/14.

Wooldridge, J.M. 2003. Introductory Econometrics. Thomson South-Western. 2 Edition.