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Inflation and Inflation Volatility in Australia
Author(s) -
Hossain Akhand Akhtar
Publication year - 2014
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12075
Subject(s) - autoregressive conditional heteroskedasticity , economics , volatility (finance) , econometrics , inflation (cosmology) , heteroscedasticity , conditional variance , forward volatility , bivariate analysis , real interest rate , monetary policy , volatility smile , monetary economics , mathematics , statistics , physics , theoretical physics
This paper highlights the problem of inflation volatility in A ustralia and deploys quarter‐on‐quarter CPI ‐inflation data over the period 1949q3–2013q4 to investigate the proposition of a feedback relation between inflation and inflation volatility in this country. The paper adopts the generalised autoregressive conditional heteroskedastic ( GARCH ) modelling technique to estimate simultaneously the conditional mean and the conditional variance of inflation and their interrelations in a dynamic context. A bivariate G ranger‐causality test is then conducted to determine whether a causal relation exists between inflation and inflation volatility, as measured by the estimated conditional variance of inflation. The empirical results suggest the presence of a feedback relation between inflation and inflation volatility with a positive (adverse) impact of inflation volatility on the rate of unemployment. A second finding of the paper, based on the preferred exponential GARCH (1,1) model, is that inflation shock has an asymmetric impact on inflation volatility. A negative (downward) inflation shock is found to have a larger effect on the log of the conditional variance of inflation than the effect of a positive inflation shock of the same magnitude. These are the key findings of the paper. The concluding section summarises its other findings and draws some of the implications for A ustralian monetary policy.