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Empirical analysis on the real effects of inflation and exchange rate uncertainty: The case of Colombia

Author

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  • Isabel Ruiz

    (Western Michigan University)

Abstract

This paper re-examines the effects of inflation and exchange rate uncertainty on real economic activity. The existent literature has treated both issues as separate subject matters. It has emphasized either the issue of inflation uncertainty or exchange rate uncertainty on economic growth or on different measures of economic activity. This paper attempts dealing with both issues by analyzing the magnitudes and direction of the effect of both: inflation and exchange rate uncertainty on real economic activity. By introducing dummy variables, we control for monetary policy change (the change to inflation targeting and flexible exchange rate). By using a generalized autoregressive conditional variance (GARCH) model of inflation and exchange rates, the conditional variances of the model’s forecast errors were extracted as measures of uncertainty. The results suggest that higher levels of inflation Granger cause more uncertainty and vice versa for the Colombian economy. Also, only inflation uncertainty matters for output by exerting a negative influence.

Suggested Citation

  • Isabel Ruiz, 2005. "Empirical analysis on the real effects of inflation and exchange rate uncertainty: The case of Colombia," International Finance 0511006, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0511006
    Note: Type of Document - pdf; pages: 22. Publiseh in 'Ecos de Economia' at
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0511/0511006.pdf
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    References listed on IDEAS

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    1. Chris Ryan & Christopher Thompson, 2000. "Inflation Targeting and Exchange Rate Fluctuations in Australia," RBA Research Discussion Papers rdp2000-06, Reserve Bank of Australia.
    2. Crawford, A & Kasumovich, M, 1996. "Does Inflation Uncertainty Vary with the Level of Inflation?," Staff Working Papers 96-09, Bank of Canada.
    3. Igal Magendzo, 1997. "Inflación e Incertidumbre Inflacionaria en Chile," Working Papers Central Bank of Chile 15, Central Bank of Chile.
    4. Ball, Laurence, 1992. "Why does high inflation raise inflation uncertainty?," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 371-388, June.
    5. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    6. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
    7. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    8. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile.
    9. Bera, Anil K & Higgins, Matthew L, 1993. " ARCH Models: Properties, Estimation and Testing," Journal of Economic Surveys, Wiley Blackwell, vol. 7(4), pages 305-366, December.
    10. 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.
    11. Henry Ma, 1998. "Inflation, Uncertainty, and Growth in Colombia," IMF Working Papers 98/161, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Amber Fatima & Abdul Waheed, 2014. "Economic uncertainty and growth performance: a macroeconomic modeling analysis for Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(3), pages 1361-1387, May.

    More about this item

    Keywords

    Inflation Targeting; Inflation Uncertainty; Exchange Rate; Uncertainty; GARCH models; Granger causality;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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