Dynamics of Inflation and Inflation Uncertainty Using ARFIMA- GARCH Model

Abstract

In this paper, we study inflation dynamics and then examine the relation of inflation and inflation uncertainty. At first, for filtering of predictable term of inflation series, we used time series model. In this way, some test like ADF, PP, KPSS were also used. The results show that integration of inflation series is neither one nor zero. Then we examine the hypothesis of fractional integration that means long memory of inflation. With applying ARFIMA model, we show that inflation has fractional integration with degree of 0.4 that is implying that Iran’s inflation has long memory and then every shock to this variable remain long run. In the next stage, we used ARFIMA residual for test GARCH model then that was used as inflation uncertainty. With granger causality test we find that the causality between inflation and uncertainty is bilateral.