Description

The purpose of this paper is to determine whether higher levels of inflation have been accompanied by higher levels of inflationary uncertainty in the Chilean economy. Modem economic theory has stressed the costs of inflationary uncertainty as well as the costs of a higher level of inflation. Moreover, it has been accepted that higher inflation levels and inflationary uncertainty are correlated. There are many of studies, with several methodologies that try to prove this hypothesis, specially for the United States. This paper uses a combination of ARIMA and GARCH methodologies in generating the usual conditional mean, as well as the conditional variance of the inflationary process which is a proxy for uncertainty. Once this variable is obtained, we verify, for the Chilean case, that higher levels of inflation have been historically accompanied by more inflationary uncertainty.