Assessing the effect of inflation uncertainty on inflation: further evidences for Latin America

Abstract

Purpose The purpose of this paper is to evaluate whether the effect of inflation uncertainty on inflation has changed over time in Latin America. Design/methodology/approach The authors use a stochastic volatility in mean (SVM) model with time-varying parameters (TVP) as proposed by Chan (2017). Findings Considering inflation series for the last two decades, we report evidences of high uncertainty from 1996 to early 2000s. Moreover, despite being positive throughout the sample, the overall relationship between inflation uncertainty and inflation has changed over the years in Latin America, underscoring the importance of our time-varying specification. Practical/implication There are evidences of a greater volatile inflation behavior in the beginning of the sample period in comparison to the last few years. Overall, the considered Latin American economies seem to have endured relatively well the external adverse shocks from the 2008 global financial crisis. Originality/value The use of an SVM model with TVP in order to assess the effect of inflation uncertainty on inflation is new to the Latin America literature.