Abstract:
This study examines the intertemporal dynamic
linkages between food price inflation and its volatility.
FIGARCH model is employed to estimate conditional
volatlity of food price inflation. The empirical evidence
derived from the monthly data for the period from
2003M1 to 2016M12 for Sri Lanka. Granger causality tests
show that food inflation seems to exert positive impact
on inflation uncertainty. Hence, the findings of the study
supports the Friedman hypothesis. This implies that past
information on food inflation can help improve the one step-ahead prediction of food inflation uncertainty but
not vice versa. In addition, our study show that volatility
of CFPI inflation also Granger causes the volatility of
WFPI inflation. Our results have some important policy
implications for the design of monetary policy, thereby
promoting macroeconomic stability. In particular, the
results indicate the importance of inflation stablization
programmes.
