Inflation Uncertainty and Output Growth - Evidence from the Asia-Pacific Countries Based on the Multiscale Bayesian Quantile Inference

This paper investigates how inflation uncertainty affects real GDP growth in five Asia-Pacific countries – Australia, New Zealand, Japan, South Korea and Indonesia, whereby these countries adopted inflation targeting (IT) strategy at some point in time. We use several elaborate methodologies – wavelet technique, GARCH with innovative distributions and the Bayesian quantile regression. We determine that inflation uncertainty negatively (positively) affects real GDP growth in periods of economic contraction (prosperity) in all the countries. In addition, the results indicate that this effect is notably stronger in the period after IT than in the period before IT, which particularly applies for Australia, New Zealand, Japan and Korea. As for Indonesia, the impact of inflation uncertainty to real GDP growth is very similar in both subsamples, because expectations about high inflation in Indonesia are well-rooted. The conclusion indicates that if country pursue reliable anti-inflationary policy, output growth can be affected relatively significantly by an excess inflation uncertainty. However, this is not the case in the systems, which are not based on a prudent and well-established anti-inflationary policy, such as Indonesian.