Inflation and Nominal Uncertainty: the case of Greece

Abstract

This paper examines the relationship between inflation and inflation uncertainty for Greece between 1981 and 2008. Univariate GARCH models are used to generate alternative measures of inflation uncertainty using both seasonally-adjusted and unadjusted data. Granger causality tests are subsequently employed to investigate causality and to detect its direction and sign. The results suggest that causality runs from inflation to inflation uncertainty while the sign of this effect is positive, in line with the Friedman-Ball hypothesis. Interestingly these findings break down in the post-1993 and post-2000 periods, arguably as a consequence of inflation-targeting, which resulted in lower inflation, reduced uncertainty and anchored expectations.

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