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Volatility and Time Series EconometricsEssays in Honor of Robert Engle$
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Tim Bollerslev, Jeffrey Russell, and Mark Watson

Print publication date: 2010

Print ISBN-13: 9780199549498

Published to Oxford Scholarship Online: May 2010

DOI: 10.1093/acprof:oso/9780199549498.001.0001

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Modeling UK Inflation Uncertainty, 1958–2006

Modeling UK Inflation Uncertainty, 1958–2006

(p.62) 4 Modeling UK Inflation Uncertainty, 1958–2006
Volatility and Time Series Econometrics

Gianna Boero

Jeremy Smith (Contributor Webpage)

Kenneth F. Wallis

Oxford University Press

The empirical application in Engle's original autoregressive conditional heteroskedastic (ARCH) paper was to UK inflation uncertainty. This chapter tests the external validity of Engle's conclusion by extending his 1958-77 sample through 2006. The chapter is organized as follows. Section 2 contains a brief review of UK inflationary experience and the associated policy environment(s), 1958-2006. Section 3 returns to Engle's original ARCH regression model, and examines its behaviour over the extended period. Section 4 turns to a fuller investigation of the nature of the nonstationarity of inflation, preferring a model with structural breaks, stationary within subperiods. Section 5 considers a range of measures of inflation forecast uncertainty, from these models and other UK sources. Section 6 considers the association between uncertainty and the level of inflation, first mooted in Milton Friedman's Nobel lecture. Section 7 concludes.

Keywords:   United Kingdom, inflation, autoregressive conditional heteroskedasticity, ARCH model, uncertainty, nonstationary behaviour

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