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Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance
Author(s) -
Fountas Stilianos,
Karanasos Menelaos,
Kim Jinki
Publication year - 2006
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2006.00164.x
Subject(s) - economics , inflation (cosmology) , econometrics , bivariate analysis , heteroscedasticity , autoregressive conditional heteroskedasticity , business cycle , autoregressive model , macroeconomics , mathematics , volatility (finance) , statistics , physics , theoretical physics
We use a bivariate generalized autoregressive conditionally heteroskedastic (GARCH) model of inflation and output growth to examine the causality relationship among nominal uncertainty, real uncertainty and macroeconomic performance measured by the inflation and output growth rates. The application of the constant conditional correlation GARCH(1,1) model leads to a number of interesting conclusions. First, inflation does cause negative welfare effects, both directly and indirectly, i.e. via the inflation uncertainty channel. Secondly, in some countries, more inflation uncertainty provides an incentive to Central Banks to surprise the public by raising inflation unexpectedly. Thirdly, in contrast to the assumptions of some macroeconomic models, business cycle variability and the rate of economic growth are related. More variability in the business cycle leads to more output growth.