The inflation uncertainty-inflation relationship: time variation across Latin America and the G7

• Autores: Alvarado, Mauricio, Rodriguez, Gabriel
• Formato: documento de trabajo
• Fecha de Publicación: 2025
• Institución: Pontificia Universidad Católica del Perú
• Repositorio: PUCP-Institucional
• Lenguaje: inglés
• OAI Identifier: oai:repositorio.pucp.edu.pe:20.500.14657/203522
• Enlace del recurso: https://hdl.handle.net/20.500.14657/203522; http://doi.org/10.18800/2079-8474.0544
• Nivel de acceso: acceso abierto
• Materia: In ation Uncertainty; In ation; Latin America; G7; Bayesian Estimation and Comparison; Stochastic Volatility in Mean; Time-Varying Parameters; Structural Breaks; https://purl.org/pe-repo/ocde/ford#5.02.01

This paper examines the evolution of the inflation uncertainty-inflation relationship in seven Latin American countries and the G7 from Q1 1948 to Q4 2023, using the time-varying parameter stochastic volatility in mean (TVP-SVM) model of Chan (2017) and its extension incorporating time-varying mixture innovations (TVP-SVM-TVMI) from Hou (2020). The key findings are as follows: (i) the TVP-SVM model is preferred in 8 out of 14 countries; (ii) inflation uncertainty has been higher in Latin America than in the G7, particularly during the 1980s "lost decade"; (iii) log-inflation uncertainty is more persistent in Latin America; (iv) there is no evidence supporting the hypothesis of Friedman (1977) in any of the countries analyzed; (v) the Cukierman-Meltzer hypothesis (1986) holds, as the uncertainty-inflation relationship is positive and time-varying in all countries; (vi) this relationship is stronger and statistically significantduring periods of high inflation uncertainty; and (vii) there is evidence of more structural breaks in this relationship in Latin America than in the G7.