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Measuring the Response of Macroeconomic Uncertainty to Shocks

  • Kalvinder Shields
  • Nilss Olekalns
  • Ólan T. Henry
  • Chris Brooks

Recent research documents the importance of uncertainty in determining macroeconomic outcomes, but little is known about the transmission of uncertainty across such outcomes. This paper examines the response of uncertainty about inflation and output growth to shocks documenting statistically significant asymmetries and spillovers. Uncertainty about inflation is a determinant of output uncertainty, while higher growth volatility tends to raise inflation volatility. Both inflation and growth volatility respond asymmetrically to positive and negative shocks. Negative growth shocks and positive shocks to inflation lead to higher and more persistent uncertainty than shocks of equal magnitude but opposite sign. Keywords: Asymmetry, Inflation, Output Growth, Variance Impulse Response Functions

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 870.

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Length: 20 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mlb:wpaper:870
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  8. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
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  12. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
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  16. Shields, KalvInder & Kevin B Grier & Olan T Henry & Nilss Olekalns, 2003. "The Asymmetric Effects of Uncertainty on Inflation and Output Growth," Royal Economic Society Annual Conference 2003 187, Royal Economic Society.
  17. Dennis W. Jansen, 1989. "Does inflation uncertainty affect output growth? Further evidence," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 43-54.
  18. 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.
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  21. 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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