Revisiting the relationship between inflation and its uncertainty in Iran: the application of continuous wavelet transform

The relationship between inflation and inflationary uncertainty has attracted the attention of many theoretical and empirical macroeconomic studies. Despite extensive studies in this field, there is still no consensus regarding the flow of causality between these two variables. In this regard, the current research uses continuous wavelet transform and analysis in the time-frequency domain to provide new insights into the relationship between inflation and its uncertainty in Iran during the period 1991 - 2022. According to the obtained results, the flow of causality between the two variables is not established and the theories related to this issue are not relevant to Iran's economy in the sense that, firstly, economic agents are generally not able to correct their forecast in the face of inflation. And secondly, the monetary authorities do not take necessary measures to stabilize the prices when they rise. In the long run, the causal flow from inflation to inflation uncertainty is established with significant intensity. The interpretation of the results in the dimension of time and its compatibility with the theoretical foundations and conditions of Iran's economy indicates that in the long run, the policymaker, in response to the increase in the general level of prices, has relatively less sensitivity to reducing inflation compared to other goals.