Real effects of inflation uncertainty in the US

Abstract

We empirically investigate the effects of inflation uncertainty on output growth for the US using both monthly and quarterly data over 1985-2009. Employing a Markov regime switching approach to model output dynamics, we show that inflation uncertainty obtained from a Markov regime switching GARCH model exerts a negative and regime dependant impact on output growth. In particular, we show that the negative impact of inflation uncertainty on output growth is almost 4.5 times higher during the low growth regime than that during the high growth regime. We verify the robustness of our findings using quarterly data