Modelling inflation, output growth and their uncertainties

Abstract

This thesis consists of three studies that cover topics in inflation and output growth, and their uncertainties in G7 and developing countries. We utilise the Consumer Price Index (CPI) and Industrial Price Index (IPI) as proxies for the inflation rate (price level) and the growth rate (output), respectively. Chapter 2 considers the case of three developing countries Turkey, Egypt and Syria. We analyse the inflation and growth using asymmetric PGARCH model. In accordance with this, we estimate all the models using two alternative distributions the normal and Student’s t. Moreover, dummy variables are chosen in the inflation data according to some economic events in Turkey, Egypt and Syria. Even more, the mean equation is adjusted to include these dummy variables on the intercept. To summarize, the results show an evidence of the Cukierman–Meltzer (1986) hypothesis, which is labelled as the ‘opportunistic Fed’ by Grier and Perry (1998), in Egypt and Syria. On the other hand, an evidence of the Holland (1995) hypothesis is obtained in Turkey, this result suggests that the ‘stabilizing Fed’ notion is plausible. Moreover, an evidence for the first leg of Friedman (1977) hypothesis is obtained in Egypt and Turkey. Chapter 3 examines the causal relationship between inflation and output growth, and their variabilities for G7 countries by applying the bivariate constant conditional correlation CCC – GARCH (1,1)-ML models. Moreover, we employ the models including dummy variables in the mean equations to investigate the impact of economic events on inflation and output. Briefly, there are evidences of the second leg of Friedman (1977) hypothesis in the US, UK, Germany, Italy, France and Canada while there is an evidence of Dotsey and Sarte (2000) in Japan. In addition, there are evidences for positive effect of inflation uncertainty on inflation in the US, Germany, Japan and France in line of Cukierman and Meltzer (1986) hypothesis. Moreover, the results of estimation CCC-GARCH (1,1) in mean models including dummy variables highlight a strong support for the two legs of Friedman (1977) hypothesis and Cukierman and Meltzer (1986). Lastly, Chapter 4 is based on examining the inflation rates for three developing countries Turkey, Syria and Egypt by applying the Bai and Perron (2003) breakpoint specification technique in the monthly inflation data of our sample. As a result, three possible break points for each of the inflation rates in the conditional variance have been determined. In addition, we employ GARCH model to control the breaks in the conditional mean and variance equations. To conclude, the autoregressive coefficients seem to cause a statistically significant impact on the breaks only in the case of Turkey, also, the parameters of the mean equation show time varying characteristics across three breaks. As far as the conditional variance is concerned the ARCH parameter (𝛼) shows no time varying behaviour while for the GARCH parameter only one significant break seems to impact the inflation rate in Syria.