Relationship between inflation rate and inflation uncertainty

To shed further light on the possible link between inflation rate and inflation uncertainty, the paper explores the relationship for US monthly inflation over 1926 to 1992 with various ARFIMA-GARCH-type models. It found that the inflation affected its uncertainty weakly negatively whereas the uncertainty affected the inflation insignificantly. The results were robust to the high inflation period of the 1970s and the volatile period of 1929 to 1945. It supports Engle's result that a high rate of inflation does not necessarily imply a high variance of inflation, unlike Friedman's view that a high rate of inflation leads to a high variance of inflation. (C) 2001 Elsevier Science BY All rights reserved.