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
Date Written: July 15, 2014
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: Suggested Citation