Regime‐dependent effects of uncertainty on inflation and output growth: evidence from the United Kingdom and the United States

Abstract

Employing a bivariate regime switching model, this paper attempts to examine the regime-dependent effects of inflation uncertainty and output growth uncertainty on inflation and output growth. Using monthly data of the United Kingdom and the United States, we provide evidence that both nominal and real uncertainty exert regime-dependent impacts on inflation. Furthermore, in case of both the countries, inflation uncertainty has adverse impact on output growth mainly during the period of economic contraction. Also, for these two countries, it can be argued that higher real uncertainty significantly reduces output growth only in their respective low output growth regimes.

Spillovers between Bitcoin and other assets during bear and bull markets

“…Second, we used a bivariate model that has the advantages of incorporating several important specifications, such as smooth transition, asymmetry, and dynamic conditional correlations (e.g., see Kundu and Sarkar, 2016;Chowdhury et al, 2018). Accounting for asymmetry and smooth transition behavior to switch between bull and bear markets was expected to add value to the existing literature on intermarket associations between Bitcoin and other asset classes, which has been dominated to date by the use of conventional and univariate models.…”

Measuring the effects of inflation and inflation uncertainty on output growth in the central and eastern European countries

“…The readiness of companies to invest even when inflation uncertainty is present, raises output growth, and this is the reason why we find positive inflation uncertainty parameters, especially at higher quantiles. A reasoning of Dotsey and Sarte (2000) also can be mentioned, although explanation of these authors has weaker economic argumentation, comparing with the paper of Chowdhury et al (2018). Dotsey and Sarte (2000) claimed that inflation uncertainty can raise GDP growth due to precautionary savings, which in turn induces higher GDP growth.…”

“…However, looking at Table 5, it should be added that inflation uncertainty also has a positive effect on GDP growth, and we find that this effect is pretty conspicuous in some countries in conditions when GDP records strong growth rates (t 0.95 quantile). At first sight, these results might seem puzzling, but Chowdhury et al (2018) offered a viable explanation. He investigated the UK and US cases and contended that, during economic slowdown, cash flows to private sector are diminished, while the private firm's balance sheets are weak.…”

“…However, in explaining these findings, we must make a distinction between Poland and the other countries, because Poland pursue independent monetary policy, while all other countries are EMU members and they do not have their own monetary policy. In that regard, the size of these relatively high parameters for EMU members could be explained by the arguments that Chowdhury et al (2018) offered. On the other hand, for Poland it may also suggest that monetary authorities of this country have a tendency to seize an opportunity and encourage GDP growth in high inflation conditions.…”

“…Besides, according to Chowdhury et al (2018), the majority of empirical studies assume that the underlying relationships between inflation phenomena and output are constant over the entire sample period, which implies that the causal links are stable over time. However, these authors strongly asserted that this assumption does not hold in practice.…”