We used the panel smooth transition regression (PSTR) model to investigate whether the relationship between inflation and macro variables remain consistent and identify the macro variables that dominate the fluctuations of inflation based on the uncertainty of interest rates and exchange rates for G7 over the period from 19841Q to 20114Q. The results of the empirical tests show that the real activity variables have superior explanatory power to CPI than unemployment rates based on the volatility of interest rates. The real activity variables have greater exploratory power to CPI because the volatility of the exchange rate is over than 40.95%.
