Inflation Volatility using Garch-Family Models; Empirical Evidence from Pakistan

In this study we are in the quest for most appropriate GARCH-family model for modeling the differenced log Consumer Price Index (CPI) CPI i.e. percentage change in CPI for Pakistan. Using various specifications for mean equation, study estimated GARCH (1,1) and GJR-GARCH (1,1). The study also estimates EGARCH (1,1) for monthly data of CPI. The estimation results reveal that ARMA (1,1)- GARCH (1,1) comes out to be most appropriate specification for modeling inflation volatility. The study finds no evidence of asymmetry in the response of inflation volatility to negative and positive shocks.