Open AccessUncertainty Effects of Inflation on Output: A MRS-IV Approach
Author(s) -
Mustafa Caglayan,
Özge Kandemir Kocaaslan,
Konstantinos Mouratidis
Publication year - 2015
Publication title -
review of economic analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.101
H-Index - 1
ISSN - 1973-3909
DOI - 10.15353/rea.v7i1.1483
Subject(s) - endogeneity , economics , output gap , econometrics , inflation (cosmology) , volatility (finance) , markov chain , instrumental variable , financial crisis , monetary policy , macroeconomics , monetary economics , statistics , mathematics , physics , theoretical physics
In this paper, we propose an analytical framework to explore the level and volatility effects of inflation on the output gap. Using quarterly US data over 1977:q2-2009:q4, we then examine the empirical implications of the model by implementing an instrumental variables Markov regime switching approach. We show that inflation uncertainty has a negative and regime dependent impact on the output gap but the level of inflation does not have any such effect. Our empirical investigation also provides evidence that the US economy is moving towards a period of turmoil before the recent financial crisis was imminent. The results are robust to the use of alternative measures of inflation uncertainty. Keywords: Output gap; inflation uncertainty; Markov-switching modeling; instrumental variables; endogeneity. JEL classification: E31, E32