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Inflation, Growth and their Uncertainties: A Bivariate GARCH Evidence for Iran

  • Mohsen Mehrara

    (Associate Professor, Faculty of Economics, University of Tehran, Iran)

  • Hossein Tavakolian

    (Ph.D. Student in Economics, Faculty of Economics, University of Tehran, Iran)

Using a bivariate GARCH model, we investigate the causal relationships between inflation, growth, inflation uncertainty (nominal uncertainty) and output uncertainty (real uncertainty) for seasonally adjusted quarterly data in Iran. Our results indicate that increased inflation is associated with higher nominal uncertainty. Further, we found that higher output uncertainty increases both inflation and growth. Increased growth, in turn, is associated with higher real uncertainty. We found no strong evidence in favor of other causal relationships which we have tested. These results support the argument of a price stability objective for the monetary authority. To mitigate the harmful effects of real uncertainty, Iran should take policy measures to withstand adverse domestic and external shocks and lessen their exposure to the volatility.

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Article provided by Economics faculty of Tehran university in its journal Iranian Economic Review.

Volume (Year): 15 (2010)
Issue (Month): 1 (winter)
Pages: 83-100

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Handle: RePEc:eut:journl:v:15:y:2010:i:1:p:83
Contact details of provider: Postal: P.O. Box 14155-6445, Postal Code 14114, Tehran
Phone: (021)634002-4
Web page: http://economics.ut.ac.ir/

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  1. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
  2. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  3. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665 National Bureau of Economic Research, Inc.
  4. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  5. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
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