Impact of Inflation Uncertainty on Unemployment

In his nobel prize lecture, Friedman points out the potential for increased inflation to create nominal uncertainty that hinders the efficient allocation of resources and reduces real output. Ever since then, there have been several theoretical and empirical discussions on the relationship between inflation, save, investment and inflation uncertainty. This study examines the effects of inflation uncertainties on unemployment. There were used time series data of Japan economy since, 1961-2010 and estimate effect of inflation uncertainty on unemployment. Therefore, researchers 1st measure inflation uncertainty using the EGARCH model and then estimate the effect of inflation uncertainty on unemployment by VAR model. Positive shocks in inflation increases inflation uncertainty but negative shocks does not change inflation increases inflation. Also, inflation uncertainty makes to reduce unemployment.