Modeling UK Inflation Uncertainty, 1958–2006

Gianna Boero, Jeremy Smith and Kenneth F. Wallis

in Volatility and Time Series Econometrics

Published in print March 2010 | ISBN: 9780199549498
Published online May 2010 | e-ISBN: 9780191720567 | DOI:

Series: Advanced Texts in Econometrics

 Modeling UK Inflation Uncertainty, 1958–2006

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The empirical application in Engle's original autoregressive conditional heteroskedastic (ARCH) paper was to UK inflation uncertainty. This chapter tests the external validity of Engle's conclusion by extending his 1958-77 sample through 2006. The chapter is organized as follows. Section 2 contains a brief review of UK inflationary experience and the associated policy environment(s), 1958-2006. Section 3 returns to Engle's original ARCH regression model, and examines its behaviour over the extended period. Section 4 turns to a fuller investigation of the nature of the nonstationarity of inflation, preferring a model with structural breaks, stationary within subperiods. Section 5 considers a range of measures of inflation forecast uncertainty, from these models and other UK sources. Section 6 considers the association between uncertainty and the level of inflation, first mooted in Milton Friedman's Nobel lecture. Section 7 concludes.

Keywords: United Kingdom; inflation; autoregressive conditional heteroskedasticity; ARCH model; uncertainty; nonstationary behaviour

Chapter.  7569 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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