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

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  • Christian Conrad
  • Menelaos Karanasos

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.

Suggested Citation

  • Christian Conrad & Menelaos Karanasos, 2015. "Modelling the Link Between US Inflation and Output: The Importance of the Uncertainty Channel," Scottish Journal of Political Economy, Scottish Economic Society, vol. 62(5), pages 431-453, November.
    • Handle: RePEc:bla:scotjp:v:62:y:2015:i:5:p:431-453
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    References listed on IDEAS

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    1. Devereux, Michael, 1989. "A Positive Theory of Inflation and Inflation Variance," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 105-116, January.
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    Cited by:

    1. Kushal Banik Chowdhury, 2024. "Relationships between inflation, output growth, and uncertainty in the era of inflation stabilization: a multicountry study," Empirical Economics, Springer, vol. 66(2), pages 623-650, February.
    2. Kushal Banik Chowdhury & Kaustav Kanti Sarkar & Srikanta Kundu, 2021. "Nonlinear relationships between inflation, output growth and uncertainty in India: New evidence from a bivariate threshold model," Bulletin of Economic Research, Wiley Blackwell, vol. 73(3), pages 469-493, July.
    3. Fuest, Angela & Schmidt, Torsten, 2020. "Inflation expectation uncertainty in a New Keynesian framework," Ruhr Economic Papers 867, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Campos-Martins, Susana & Amado, Cristina, 2025. "Modelling dynamic interdependence in nonstationary variances with an application to carbon markets," Journal of Economic Dynamics and Control, Elsevier, vol. 173(C).
    5. Karanasos, M. & Koutroumpis, P. & Karavias, Y. & Kartsaklas, A. & Arakelian, V., 2016. "Inflation convergence in the EMU," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 241-253.
    6. Aaron D. Smallwood, 2022. "Inference in Misspecified GARCH‐M Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 334-355, April.
    7. O. Evans, 2019. "Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?," Journal of African Business, Taylor & Francis Journals, vol. 20(3), pages 392-406, July.
    8. Conrad, Christian & Hartmann, Matthias, 2019. "On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies," European Journal of Political Economy, Elsevier, vol. 56(C), pages 233-250.
    9. Mihaela SIMIONESCU, 2016. "The Identification Of Inflation Rate Determinants In The Usa Using The Stochastic Search Variable Selection," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 8(1), pages 171-181, March.
    10. Kushal Banik Chowdhury & Nityananda Sarkar, 2019. "Regime Dependent Effect Of Output Growth On Output Growth Uncertainty: Evidence From Oecd Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 257-282, July.
    11. Eyayu Tesfaye Mulugeta, 2025. "Output Growth Volatility, Remittances, and Financial Development in the Common Market for Eastern and Southern Africa Region: A System Generalized Method of Moments Approach," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(1), pages 2844-2860, March.
    12. Karanasos, Menelaos & Menla Ali, Faek & Margaronis, Zannis & Nath, Rajat, 2018. "Modelling time varying volatility spillovers and conditional correlations across commodity metal futures," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 246-256.
    13. Kushal Banik Chowdhury & Srikanta Kundu & Nityananda Sarkar, 2018. "Regime‐dependent effects of uncertainty on inflation and output growth: evidence from the United Kingdom and the United States," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(4), pages 390-413, September.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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