The Effects of Uncertainty on Macroeconomic Performance: The Importance of the Conditional Covariance Model
AbstractWe study the effects of growth volatility and inflation volatility on average rates of output growth and inflation for postwar U.S. data in a multivariate asymmetric GARCH-M model. Our statistical model differs from other work in that we allow the conditional covariance of inflation and growth to be both nondiagonal and asymmetric. We show that the data reject diagonality and symmetry restrictions frequently imposed in the literature. Our results on the macroeconomic effects of uncertainty also differ from those in other recent studies using a more restrictive covariance model. Specifically, we find that increased growth uncertainty is associated with significantly higher average growth, and that higher inflation uncertainty is significantly negatively correlated with lower output growth and lower average inflation.
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Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 818.
Length: 40 pages
Date of creation: 2001
Date of revision:
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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
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Web page: http://www.economics.unimelb.edu.au
More information through EDIRC
Asymmetry; Multivariate GARCH-M; Inflation; Uncertainty; Growth;
Find related papers by JEL classification:
- E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
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