Inflation and Inflation Uncertainty in Turkey

Abstract: In this study, the relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analyses for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed