The relationship between inflation and inflation uncertainty: Evidence from the Turkish economy

Abstract

In the present study, we examine the relationship between inflation and inflation uncertainty in Turkey from 2002 to 2011 using two-step procedure. At first step, ARMA-GARCH model of monthly inflation data is estimated and the conditional variance from these estimates is indicated as the monthly inflation uncertainty series. Then, the Granger causality tests between primarily inflation and generated inflation uncertainty series are performed. Empirical results of our study provided strong evidence in favor of the Friedman-Ball hypothesis that inflationary period result in high inflation uncertainty in Turkish case. These results present significant implications for the relationship between inflation and inflation uncertainly in developing countries as much as monetary policy adopted Inflation Targeting in Turkey.