INFLATION AND INFLATION UNCERTAINTY IN ROMANIA

In this paper, we analyze the causality between inflation and inflation uncertainty in Romania. The monthly growth in Consumer Price Index (CPI) in the period from October 1990 to December 2012 has been used as an inflation measure. The inflation uncertainty is estimated by the conditional variances of inflation obtained by the GARCH models selected with Akaike and Schwarz information criteria. In order to ensure the robustness of the results, the Granger-causality tests are performed for four, eight and twelve lags, and they are then used to test two economic hypotheses. Our results showed that the inflation significantly Granger-causes inflation uncertainty, confirming the Friedman-Ball hypothesis, but no empirical evidence was found to support the Cukierman - Meltzer hypothesis, that inflation uncertainty Granger-causes inflation.