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Empirical analysis on the real effects of inflation and exchange rate uncertainty: The case of Colombia

Isabel Ruiz ()

International Finance from EconWPA

Abstract: This paper re-examines the effects of inflation and exchange rate uncertainty on real economic activity. The existent literature has treated both issues as separate subject matters. It has emphasized either the issue of inflation uncertainty or exchange rate uncertainty on economic growth or on different measures of economic activity. This paper attempts dealing with both issues by analyzing the magnitudes and direction of the effect of both: inflation and exchange rate uncertainty on real economic activity. By introducing dummy variables, we control for monetary policy change (the change to inflation targeting and flexible exchange rate). By using a generalized autoregressive conditional variance (GARCH) model of inflation and exchange rates, the conditional variances of the model’s forecast errors were extracted as measures of uncertainty. The results suggest that higher levels of inflation Granger cause more uncertainty and vice versa for the Colombian economy. Also, only inflation uncertainty matters for output by exerting a negative influence.

Keywords: Inflation Targeting; Inflation Uncertainty; Exchange Rate; Uncertainty; GARCH models; Granger causality (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Date: 2005-11-27
Note: Type of Document - pdf; pages: 22. Publiseh in 'Ecos de Economia' at
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0511006

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