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

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Author Info
Isabel Ruiz (Western Michigan University)

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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.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0511006.

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Length: 22 pages
Date of creation: 27 Nov 2005
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Handle: RePEc:wpa:wuwpif:0511006

Note: Type of Document - pdf; pages: 22. Publiseh in 'Ecos de Economia' at
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Web page: http://129.3.20.41

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Related research
Keywords: Inflation Targeting; Inflation Uncertainty; Exchange Rate; Uncertainty; GARCH models; Granger causality;

Find related papers by JEL classification:
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Igal Magendzo, 1997. "Inflación e Incertidumbre Inflacionaria en Chile," Working Papers Central Bank of Chile 15, Central Bank of Chile. [Downloadable!]
  2. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August. [Downloadable!] (restricted)
  3. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile. [Downloadable!]
    Other versions:
  4. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June. [Downloadable!] (restricted)
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia. [Downloadable!]
  7. Bera, Anil K & Higgins, Matthew L, 1993. " ARCH Models: Properties, Estimation and Testing," Journal of Economic Surveys, Blackwell Publishing, vol. 7(4), pages 305-66, December.
  8. Crawford, A & Kasumovich, M, 1996. "Does Inflation Uncertainty Vary with the Level of Inflation?," Working Papers 96-09, Bank of Canada. [Downloadable!]
  9. Kevin B. Grier & Mark J. Perry, 2000. "The effects of real and nominal uncertainty on inflation and output growth: some garch-m evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 45-58. [Downloadable!]
  10. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June. [Downloadable!] (restricted)
    Other versions:
  11. Henry Ma, 1998. "Inflation, Uncertainty, and Growth in Colombia," IMF Working Papers 98/161, International Monetary Fund.
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