Monday, August 16, 2010

I got your uncertainty right here!

In the blogoscopic debate about the importance of policy uncertainty for the weak recovery, not so much attention has been directed to monetary policy uncertainty.

In a great post over at Carpe Diem, Mark Perry shows that inflation has become much less predictable in the recent past. Here's a chart from his post:

GARCH is "generalized auto-regressive conditional heteroskedasticity". I can't tell from the graph though if MP is plotting the conditional variance or the conditional standard deviation.

In addition, I have written papers with Mark and others showing that inflation uncertainty lowers output growth.

Makes you think, no?

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