Inflation and Inflation Uncertainty in Iran: Evidence from GARCH Modeling

Inflation and its related uncertainty can impose costs on real economic output in any economy. This paper analyzes the relationship between inflation and inflation uncertainty in Iran. Initial estimates show the inflation rate to be a stationary process. The paper is going to use the GARCH model to involve the volatility consideration to fit the price index, and then forecast the short-term index in respect to the historic volatility features and compare with some other models without considerations of the volatility variance. The maximum likelihood estimates from the GARCH model reveal strong support for the presence of a positive relationship between the level of inflation and its uncertainty. The Granger causality results indicate a feedback between inflation and uncertainty