The Relation between Inflation and Inflation Uncertainty in Iran

Decreasing inflation uncertainty, as the major source of welfare costs, requires finding the driving factors of this variable. Counting inflation as one of the driving factors of inflation uncertainty has created some concern due to the ambiguity over the causality between inflation and inflation uncertainty. This ambiguity has inspired several studies in the literature, which mostly focuses on testing two separate hypotheses to solve this ambiguity. These hypotheses are Friedman-Ball hypothesis, which assumes higher inflation leads to higher inflation uncertainty, and Cukierman-Meltzer hypothesis, which claims the reverse. After testing for Friedman-Ball and Cukierman-Meltzer hypotheses in Iranian economy, with applying TGARCH and EGARCH models, this study reveals that EGARCH model supports the asymmetry in error terms distribution of Iranian data and accepts both hypotheses. However, results based on TGARCH approach do not support the asymmetry in error terms distribution, which implies TGARCH model is not reliable for Iranian data