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The Impact of Inflation Uncertainty on Economic Growth: A MRS-IV Approach

  • Mustafa Caglayan

    ()

    (School of Management and Languages, Heriot-Watt University)

  • Ozge Kandemir

    (Department of Economics, The University of Sheffield)

  • Kostas Mouratidis

    (Department of Economics, The University of Sheffield)

In this paper, we propose an analytical framework to explore the level and volatility effects of inflation on the output gap. Using quarterly US data over 1977:q2-2009:q4, we then examine the empirical implications of the model by implementing an instrumental variables Markov regime switching approach. We show that inflation uncertainty has a negative and regime dependent impact on the output gap but the level of inflation does not have any such e ect. Our empirical investigation also provides evidence that the US economy is moving towards a period of turmoil before the recent financial crisis was imminent. The results are robust to the use of alternative measures of inflation uncertainty.

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File URL: http://www.shef.ac.uk/economics/research/serps/articles/2012_025.html
File Function: First version, 2012
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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2012025.

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Length: 27 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:shf:wpaper:2012025
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