The Impact of Inflation Uncertainty on Economic Growth: A MRS-IV Approach

Mustafa Caglayan (), Ozge Kandemir and Kostas Mouratidis
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Ozge Kandemir: Department of Economics, The University of Sheffield

No 2012025, Working Papers from The University of Sheffield, Department of Economics

Abstract: 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 e ect. 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 (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012
New Economics Papers: this item is included in nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2012025

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