Uncertainty Effects of Inflation on Output: A MRS-IV Approach

  • Mustafa Caglayan Heriot–Watt University
  • Ozge Kandemir Kocaaslan Hacettepe University
  • Konstantinos Mouratidis University of Sheffield Department of Economics 9 Mappin Street Sheffield,S1 4DT UK

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 effect. 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.

Keywords: Output gap; inflation uncertainty; Markov-switching modeling; instrumental variables; endogeneity.
JEL classification: E31, E32

Author Biography

Konstantinos Mouratidis, University of Sheffield Department of Economics 9 Mappin Street Sheffield,S1 4DT UK

 

May 26th, 2015

 

 

 

 

Dear Editor:

 

 

 

I would like to submit my joint paper with M. Caglayan and O. Kandemir Kocaaslan titled “Uncertainty Effects of Inflation on Output: A MRS-IV Approach” to be considered for potential publication at the Review of Economic Analysis . Thank you very much for your consideration.

 

 

 

 

 

Yours sincerely,

 

 

 

Dr Kostas Mouratidis

University of Sheffield

Department of Economics

9 Mappin Street

Sheffield, S1 4DT

 

Published
2015-11-27
Section
Articles