Inflation and Economic Activity in Advanced and Emerging Economies

Abstract

Although the inflation rates have been low in recent years, the uncertainties that put downward pressure on inflation remain the key uncertainties that economies around the world are facing, and they could be unexpectedly persistent. In this paper, we investigate the relation between nominal uncertainty and macroeconomic performance in the G7 and EM7 countries. We use a bivariate VARMA GARCH-in-Mean asymmetric BEKK model to estimate the response of output growth to inflation uncertainty We find that inflation uncertainty is persistent in move of the G7 and EM7 countries. The uncertainty surrounding future inflation lowers output growth in most of the G7 countries, however, the effect is mixed in the EM7 countries.