MODELLING INFLATION UNCERTAINTY IN TRANSITION ECONOMIES:THE CASE OF RUSSIA AND THE FORMER SOVIET REPUBLICS

Abstract

This study investigates the linkage between inflation and inflation-uncertainty in seven transitional economies ( Armenia , Azerbaijan , Georgia , Kazakhstan , the Kyrgyz Republic , the Russian Federation and the Ukraine ) which experienced hyper-inflation until the mid-1990s. This linkage is investigated in the ARCH modelling framework by using both conventional Granger non-causality testing and the Holmes-Hutton approach, which has significant small- and large-sample power advantages over the former. The results support the Friedman-Ball hypothesis in Azerbaijan , the Russian Federation and the Ukraine . The Cukierman-Meltzer hypothesis is favoured in the Kyrgyz Republic and in the Russian Federation using a different model. In Azerbaijan , greater inflation uncertainty preceded lower rates of inflation, indicative of the strong monetary stabilization policies pursued in this economy.