The Dynamic Interaction between Inflation and Inflation Uncertainty: Evidence from Jordan
DOI:
https://doi.org/10.35516/jjes.v11i2.1784Keywords:
Inflation. Inflation uncertainty. ARMA. GARCH. VAR. Monetary Policy. JordanAbstract
Objective: This paper investigates the dynamic interaction between inflation and inflation uncertainty in Jordan using quarterly data from 1976: Q1 to 2023: Q1. This is important because achieving price stability and managing inflation expectations are crucial issues in modern monetary policy analysis. It assumes that central banks should consider the interaction between inflation and inflation expectations in designing an appropriate objective function and/or reaction function.
Method: Three types of time series models are used to investigate the dynamic interaction between inflation and inflation uncertainty: Autoregressive Moving Average (ARMA), Autoregressive Conditional Heteroskedasticity (ARCH), and Generalized Autoregressive Conditional Heteroskedasticity (GARCH).
Results: The results of the mean equation show that past inflation has a significant effect on current inflation. Conversely, the results of the variance equation indicate a high degree of uncertainty persistence in response to inflationary shocks. The Wald VAR Granger causality test provides evidence showing bidirectional causality from inflation-to-inflation uncertainty and from inflation uncertainty to inflation, supporting the "Friedman-Ball Hypothesis" and the "Cukierman-Meltzer Hypothesis".
Conclusions: The price stabilization commitment of monetary policy has not reduced the impact of current inflation on future inflation uncertainty, nor has it lessened the feedback effect from future inflation uncertainty to current inflation. This suggests that the private sector in Jordan may need more trust in the efficacy of the monetary policy's stabilization approach. Therefore, the study suggests that the Central Bank of Jordan should enhance the credibility of monetary policy and attempt to control inflation and inflation uncertainty through restrictive, proactive, and robust disinflationary measures.
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