Inflation and Inflation Uncertainty in Latvia

Working Paper 4/2007

Abstract
The paper considers interrelation between inflation and inflation uncertainty in Latvia. The monthly growth in CPI in the period from January 1994 to June 2007 has been used as an inflation measure. The application of the GARCH-M model with lagged inflation in GARCH equation proves that a positive relationship between inflation and inflation uncertainty does exist. It suggests that increased inflation uncertainty raises inflation, and, vice versa, increased inflation is a cause for higher uncertainty about inflation in the future.

Keywords: inflation, inflation uncertainty, GARCH-M

JEL codes: C22, E31, E37