Infation and infation uncertainty: The position of the Bank of Mexico, 1969-2017

Abstract

This research paper examines the relationship between inflation and inflation uncertainty for the Mexican economy during the period from January 1969 to February 2017. Using SARMA-GARCH models and their extensions (GJR-GARCH-M and E-GARCH-M), the study evidenced a negative causal effect of financial uncertainty on inflation (compliance with Holland's hypothesis), which indicates that the Bank of Mexico exhibits a stabilizing behavior in relation to inflation. It also confirms the fulfillment of the Friedman-Ball hypothesis, which states that high levels of inflation increase inflation uncertainty.