Abstract:
This study examines the dynamic linkages between food price inflation and its volatility in the context of Sri Lanka. The empirical
evidence derived from the monthly data for the period from 2003M1 to 2017M12 for Sri Lanka. The relationship between inflation
rate and inflation volatility has attracted more attention by theoretical and empirical macroeconomists. Empirical studies on the
relationship between food inflation and food inflation variability is scarce in the literature. Food price inflation is defined as log
difference of food price series. The volatility of a food price inflation is measured by conditional variance generated by the
FIGARCH model. Preliminary analysis showed that food inflation is stationary series. Granger causality test reveals that food
inflation seems to exert positive impact on inflation variability. We find no evidence for inflation uncertainty affecting food inflation
rates. Hence, the findings of the study supports the Friedman-Ball hypothesis in both cases of consumer food price inflation and
wholesale food price inflation. This implies that past information on food inflation can help improve the one-step-ahead prediction of
food inflation variability but not vice versa. Our results have some important policy implications for the design of monetary policy,
food policy thereby promoting macroeconomic stability
