Another Perspective on the Effects of Inflation Uncertainty

This paper reexamines the effects of inflation uncertainty on real economic activity by utilizing a flexible, dynamic, multivariate framework that accommodates possible interaction between the conditional means and variances. The empirical model is based on the identified vector autoregressive regression of Bernanke and Gertler (1995), modified to accommodate multivariate generalized autoregressive conditional heteroskedasticity. Our empirical model is preferred to the baseline VAR by likelihood based information criteria, and it retains the important dynamics of the underlying VAR. We find that a one-standard deviation increase in inflation uncertainty has tended to reduce output growth after two months by more than 2%. This effect is statistically and economically significant, and it is measurable over various sub-samples, such as prior to 1979 and after 1982. JEL: E52, C32