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

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Mustafa Caglayan & Ozge Kandemir & Kostas Mouratidis, 2012. "The Impact of Inflation Uncertainty on Economic Growth: A MRS-IV Approach," Working Papers 2012025, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2012025
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    More about this item

    Keywords

    output gap; inflation uncertainty; Markov-switching modeling; instrumental variables; endogeneity;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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