On the inflation-uncertainty hypothesis in the USA, Japan and the UK: a dual long memory approach

We use parametric models of long memory in both the conditional mean and the conditional variance of inflation and monthly data in the USA, Japan and the UK for the period 1962-2001 to examine the relationship between inflation and inflation-uncertainty. In all countries, inflation significantly raises inflation-uncertainty as predicted by Friedman. Increased nominal uncertainty affects inflation in Japan and the UK but not in the same manner. The results from Japan support the Cukierman-Meltzer hypothesis. In the UK uncertainty surrounding the future inflation appears to have a mixed impact on inflation.