Modeling the Link between US Inflation and Output: The Importance of the Uncertainty Channel

Scottish Journal of Political Economy, Forthcoming.

27 Pages Posted: 26 Nov 2010 Last revised: 7 Aug 2014

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Menelaos Karanasos

Brunel University London - Economics and Finance

Date Written: July 15, 2014

Abstract

This paper employs an augmented version of the UECCC GARCH specification proposed in Conrad and Karanasos (2010) which allows for lagged in-mean effects, level effects as well as asymmetries in the conditional variances. In this unified framework we examine the twelve potential intertemporal relationships between inflation, growth and their respective uncertainties using US data. We find that high inflation is detrimental to output growth both directly and indirectly via the nominal uncertainty. Output growth boosts inflation but mainly indirectly through a reduction in real uncertainty. Our findings highlight how macroeconomic performance affects nominal and real uncertainty in many ways and that the bidirectional relation between inflation and growth works to a large extent indirectly via the uncertainty channel.

Keywords: Bivariate GARCH Process, Volatility Feedback, Inflation Uncertainty, Output Variability

JEL Classification: C32, C51, E31

Suggested Citation

Conrad, Christian and Karanasos, Menelaos, Modeling the Link between US Inflation and Output: The Importance of the Uncertainty Channel (July 15, 2014). Scottish Journal of Political Economy, Forthcoming., Available at SSRN: https://ssrn.com/abstract=1715088 or http://dx.doi.org/10.2139/ssrn.1715088

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Menelaos Karanasos

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

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