Permanent and transitory components of inflation uncertainty

This paper adopts a Markov regime-switching heteroskedasticity approach to analyze the inflation of BRIC countries, i.e. Brazil, Russia, India and China. In particular, this paper examines the relation between inflation and its uncertainty over the short- and long-run for the period 1993-2011. The approach used in the present paper decomposes inflation uncertainty into permanent and transitory components. Furthermore, the regime shifts provide a framework to examine the link between inflation and its uncertainty over different time periods and also test the Friedman’s theory for the four economies under consideration.