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Asymmetric effects of inflation shocks on inflation uncertainty

  • Barbara Caporale
  • Tony Caporale

The empirically documented regularity that dis-inflationary shocks are associated with larger output changes than are positive shocks presents an interesting puzzle to macroeconomists. This paper presents, and empirically supports, a new explanation for this asymmetry. The authors show, using a TARCH model, that negative inflationary shocks result in greater inflation uncertainty than positive shocks. As Friedman [1977] argues, and a body of empirical evidence demonstrates, inflation uncertainty leads to lower output growth. Drawing on this explanation, this essay points to an avenue by which the output asymmetry of inflationary shocks can be explained. Copyright International Atlantic Economic Society 2002

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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 30 (2002)
Issue (Month): 4 (December)
Pages: 385-388

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Handle: RePEc:kap:atlecj:v:30:y:2002:i:4:p:385-388
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  1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
  2. 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.
  3. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  4. Caporale, Tony & McKiernan, Barbara, 1997. "High and variable inflation: Further evidence on the Friedman hypothesis," Economics Letters, Elsevier, vol. 54(1), pages 65-68, January.
  5. Davis, George & Kanago, Bryce, 1996. "On Measuring the Effect of Inflation Uncertainty on Real GNP Growth," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 163-75, January.
  6. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
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