Title: Dynamics of inflation and inflation uncertainty in Pakistan

Authors: Kashif Munir; Nimra Riaz

Addresses: Department of Economics, University of Central Punjab, Lahore, 54000, Pakistan ' Department of Economics, University of Central Punjab, Lahore, 54000, Pakistan

Abstract: This study analyses the dynamics of inflation and inflation uncertainty in Pakistan, while inflation has been disaggregated into food inflation and non-food inflation from July 1998 to March 2018. The study follows two step procedure, an ARMA-GARCH model is used in the first step with the generated conditional variance used as measure of inflation uncertainty, while Granger causality test is performed in the second step to find the relationship between the variables. Mean equation of inflation, food inflation, and non-food inflation show that past inflation has significant effect on current inflation, while variance equation shows high persistence of inflation. Unidirectional causality exists from inflation to inflation uncertainty as well as from food inflation to food inflation uncertainty and supports the Friedman-Ball hypothesis. Monetary authorities have to adopt price stability as the primary objective, while core inflation has to be taken as a target of monetary policy, instead of headline inflation.

Keywords: inflation; inflation uncertainty; ARMA; autoregressive moving average; ARCH; autoregressive conditional heteroscedasticity; GARCH; generalised autoregressive conditional heteroscedasticity; Pakistan.

DOI: 10.1504/IJMEF.2020.107679

International Journal of Monetary Economics and Finance, 2020 Vol.13 No.2, pp.130 - 145

Received: 02 Jul 2019
Accepted: 03 Oct 2019
Published online: 08 Jun 2020 *

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