The Inflation Uncertainty-Inflation Relationship: Time Variation Across Latin America and the G7

This paper examines the evolution of the inflation uncertainty-inflation relationship in seven Latin American countries and the G7 from Q1 1948 to Q4 2023, using the time-varying parameter stochastic volatility in mean (TVP-SVM) model of Chan (2017) and its extension incorporating time-varying mixture innovations (TVP-SVM-TVMI) from Hou (2020). The key findings are as follows: (i) the TVP-SVM model is preferred in 8 out of 14 countries; (ii) ination uncertainty has been higher in Latin America than in the G7, particularly during the 1980s "lost decade"; (iii) log-inflation uncertainty is more persistent in Latin America; (iv) there is no evidence supporting the hypothesis of Friedman (1977) in any of the countries analyzed; (v) the Cukierman-Meltzer hypothesis (1986) holds, as the uncertainty-inflation relationship is positive and time-varying in all countries; (vi) this relationship is stronger and statistically significant during periods of high inflation uncertainty; and (vii) there is evidence of more structural breaks in this relationship in Latin America than in the G7.

JEL Classication: C11, C15, C58, E31, N16.
Keywords: Inflation Uncertainty, Inflation, Latin America, G7, Bayesian Estimation and Comparison, Stochastic Volatility in Mean, Time-Varying Parameters, Structural Breaks.

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