Modelling the Link Between US Inflation and Output: The Importance of the Uncertainty Channel

Christian Conrad and Menelaos Karanasos

Scottish Journal of Political Economy, 2015, vol. 62, issue 5, 431-453

Abstract: type="main" xml:id="sjpe12083-abs-0001">

This article 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 among 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.

Date: 2015
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Working Paper: Modeling the link between US inflation and output: the importance of the uncertainty channel (2010)
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