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February 1984, 
Vol. 66, No. 2
Posted 1984-02-01

Does Higher Inflation Lead to More Uncertain Inflation?

by A. Steven Holland

A. Steven Holland investigates the relationship between the rate of inflation and the level of inflation uncertainty. He cites evidence from previous studies of this relationship and discusses the theoretical arguments concerning the likely consequences of greater inflation uncertainty on the economy. Holland demonstrates that the results from empirical tests of the hypothesis that higher inflation leads to more uncertainty about future inflation are sensitive both to the measure of inflation uncertainty used and to the inclusion of energy shocks into the analysis. He finds that, if individuals incorporate the impact of energy shocks in their predictions of future inflation, there is no significant link between inflation and inflation uncertainty. On the other hand, using measures of inflation uncertainty derived from the Livingston survey of inflation expectations, he finds a positive relationship between the rate of inflation and inflation uncertainty even if the positive impact of energy shocks on inflation uncertainty are included in the analysis. Holland argues that the latter result is more likely to reflect the actual relationship between the rate of inflation and inflation uncertainty. Thus, he concludes, the reduction of inflation uncertainty is an important, albeit often overlooked, benefit of anti-inflation policies.