ON INFLATION AND INFLATION UNCERTAINTY IN THE G7 COUNTRIES

The relationship between inflation and inflation uncertainty is invest igated 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 for causality between average inflation and infla tion uncertainty. In all G7 countries, inflation significantly raises inflation uncertainty as predicted by Friedman and Ball. Weaker eviden ce is found that inflation uncertainty Granger-causes inflation. In th ree countries (US, UK and Germany) increased inflation uncertainty low ers inflation while in two countries (Japan and France) increased infl ation uncertainty raises inflation. (C) 1998 Elsevier Science Ltd. All rights reserved.