Inflation and Inflation Uncertainty The Case of Iran

Uncertainty about future inflation is often claimed to be one of the most importantcosts of inflation, as it distorts the working of the price system and impairs theefficiency of the resource allocation mechanism. This paper analyses the Iranianinflation during 1958-2008 using GARCH class of models which enables inflationuncertainty to be modelled directly. The paper finds that the future inflationuncertainty is sensitive to bad news (unexpected increase in inflation) while itappears almost unaffected when there is good news (unexpected decrease ininflation). It also finds that inflation has a positive effect on inflation uncertainty thatconfirms Milton Friedman’s hypothesis expressed in has Nobel lecture (1977).However, inflation uncertainty has a negative but insignificant effect on inflation.This negative sign supports Holland’s finding (1995) who explains this by thestabilisation motive of the policy makers.Overall, the findings of this paper are supporting this view that greater uncertainty ispart of the costs of inflation in the Iranian economy.

کلیدواژه ها:

Inflation ، Inflation uncertainty ، ARCH ، GARCH ، News impact curve ، Leverage effect