The Nonlinear Relationship between In??ation and In??ation Uncertainty : Evidence of the East Asian Countries

Abstract

We revisit the relationship between in??ation and in??ation uncertainty by a nonlinear ??exible regression model of four economies in East Asia, that is, Taiwan, Hong Kong, Singapore, and South Korea. Two hypothesis will be examined. One hypothesis is proposed by Friedman (1977). He argued that increased in??ation could raise in??ation uncertainty. The other hypothesis is provided by Cukierman and Meltzer (1986), they argued that high level of in??ation uncertainty will cause higher rate of in??ation. We ??nd overwhelming statistical evidences in favor of Friedman's hypothesis except for Hong Kong. The nonlinearity displays a U shape pattern, implying that high rate of in??ation or de??ation will cause high in??ation uncertainty. On the other hand, Cukierman-Meltzer's hypothesis is also evidenced for all four economies. Hong Kong, Singapore, and South Korea have a positive relation in favor of Cukierman-Meltzer's hypothesis, while Taiwan has a inverted-U shape.