The Missing Link: Intra-Country Evidence on the Relationship between High and Uncertain Inflation from High-Inflation Countries

Since there is some evidence that countries with higher inflation rates have higher sample variances of inflation, it has often been inferred that inflation uncertainty within a country varies directly with the inflation rate. This proposition is directly tested by testing for heteroskedasticity in inflation regressions for 10 countries with high inflation. Little, if any, evidence of heteroskedasticity is found for the high inflation countries that are studied. The possible exceptions are Bolivia, Chile, and Turkey. The results stand up to changes in specification, and are consistent with results based on actual forecasts. Because the results fail to find an obvious and significant link within countries between the level and uncertainty of inflation they cast doubt on the idea that higher inflation causes more uncertain inflation. The results do not rule out that over longer period of time there might be occasional changes in the mean and variance of the process generating inflation.