Inflation and Inflation Uncertainty Dynamics in the Economy of Iran, Considering Regime Switching

In this essay we are analyzing dynamics of inflation and inflation uncertainty in Iran during 1988:3-2012:3using Markov Regime Switching Heteroscedasticity model (MRSH). This model allows us to measure regime changes in the mean and variance of inflation and closely study inflation and inflation uncertainty in short and long runs. Findings show that there is a positive relationship between inflation and inflation uncertainty in the long run; while in the short run the relationship is negative. Therefore، Friedman-Ball hypothesis which supports positive effect of inflation on inflation uncertainty can only be justified in limited scale in the long run.