Empirical analysis on the real effects of inflation and exchange rate uncertainty: The case of Colombia
AbstractThis 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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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0511006.
Length: 22 pages
Date of creation: 27 Nov 2005
Date of revision:
Note: Type of Document - pdf; pages: 22. Publiseh in 'Ecos de Economia' at
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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:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-CBA-2005-12-09 (Central Banking)
- NEP-IFN-2005-12-09 (International Finance)
- NEP-MON-2005-12-09 (Monetary Economics)
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