Inflation and Inflation Uncertainty in Turkey

Abstract

An extensive body of both empirical and theoretical literature focuses on the relationship between the rate of inflation and inflation uncertainty. Recent studies by Brunner and Hess (1993), Evans and Watchel (1993), and Ball and Cecchetti (1990) find statistical support for a positive association between the rate of inflation and inflation uncertainty in the U.S.1 Theoretical studies by Cukierman and Meltzer (1986), Cukierman (1992) and Ball (1992) address the issue of the direction of causality between inflation and inflation uncertainty. Ball claims that higher inflation creates greater inflation uncertainty, while according to Cukierman and Meltzer inflation uncertainty leads to higher average inflation due to opportunistic central bank behavior. More recent empirical work focuses specifically on the direction of causality between inflation and inflation uncertainty. Holland (1995) finds that inflation raises inflation uncertainty in the U.S. and also that higher inflation uncertainty leads to lower average inflation due to stabilization motives of policymakers. Grier and Perry (1998) show that inflation significantly raises inflation uncertainty in all G-7 countries but that increased inflation uncertainty raises inflation only in Japan and France. Evidence of stabilizing behavior is found in the U.S., U.K. and Germany where increased inflation uncertainty lowers average inflation.