Analyzing exchange rate uncertainty and bilateral export growth in China: A multivariate GARCH-based approach

Dramatic changes to exchange rate policy for the world's largest exporter have arguably ushered in the optimal environment for studying the effects of exchange rate uncertainty on trade. This study builds on the recent literature by using an extremely general model that measures volatility using the flexible multivariate DCC-GARCH model to analyze the impact exchange rate uncertainty has on bilateral export growth for China's ten largest export markets. All model parameters are estimated simultaneously and lagged values of uncertainty are included for a full year, where significant effects are found. The more general methods potentially overcome issues associated with inefficient two-step methods and the assumption that volatility impacts are close to instantaneous. Using a comprehensive sample that spans 1994–2017, the paper presents evidence that exchange rate uncertainty has no impact on trade with the United States, which strongly contrasts a robust finding of trade deterring impacts for almost all remaining countries. The unifying methodology is also used to analyze nominal uncertainty itself. Here, it is found that Chinese inflation may be a positive contributor to risk in an environment where many exogenous events, such as the Asian currency crisis, are associated with periods of heightened yuan uncertainty.     

Inflation and inflation volatility in Thailand

Quarterly data for Thailand are used in this article for the period 1965q3–2013q4 to investigate both the relationship between inflation and inflation volatility, and the impact of inflation volatility on economic growth. Inflation volatility is estimated by deploying the generalized autoregressive conditional heteroscedastic (GARCH) technique. A Granger causality test is then conducted to examine the causality between inflation and inflation volatility. The empirical results obtained are consistent with a number of theoretical propositions. First, the results are consistent with the Friedman–Ball proposition, which states that a rise in inflation raises inflation volatility. Second, there is evidence supporting the Holland proposition that inflation volatility lowers the rate of inflation. This is consistent with the view that central banks attempt to stabilize inflation with the rise in inflation volatility. Third, empirical results obtained by asymmetric GARCH models suggest that inflation shocks have an asymmetric impact on inflation volatility (i.e. a positive inflation shock has a larger impact on inflation volatility – as measured by the logarithm of the conditional variance of inflation – than a negative inflation shock). Fourth, inflation volatility has an adverse impact on economic growth. Finally, given the fixed/pegged or managed float exchange rate system, US inflation has been found to have a positive impact on inflation and its volatility in Thailand. This article discusses the implications of empirical findings on the design and enactment of monetary policy for price stability in Thailand.     

不确定性、通货膨胀与产出增长

基于中国1952—2004年的数据,通过GARCH-M模型和广义脉冲响应函数对不确定性、通货膨胀与产出增长进行实证分析。结果发现:通货膨胀不确定性与产出增长负相关;产出增长不确定性与产出增长负相关;产出增长不确定性与通货膨胀正相关;通货膨胀不确定性与通货膨胀负相关;产出增长冲击和通货膨胀冲击对产出增长不确定性和通货膨胀不确定性的影响存在滞后性和非对称性;产出增长对产出增长冲击的动态响应最大,通货膨胀对产出增长冲击的动态响应以及产出增长对通货膨胀冲击的动态响应最小,通货膨胀对通货膨胀冲击的动态响应居中。     

Has the 2008 financial crisis and its aftermath changed the impact of inflation on inflation uncertainty in member states of the european monetary union?

We study to what extent the financial crisis of 2008 and its aftermath have changed the impact of inflation on inflation uncertainty in the 12 original member states of the European Monetary Union (EMU). We adopt a time‐varying coefficient regression model with stochastic volatility effects, and extract two measures of inflation uncertainty from our data, namely, (1) The conditional volatility of inflation, (2) The conditional volatility of steady‐state inflation. (1)–(2) represent short‐run and steady‐state inflation uncertainty, respectively. The time‐varying impact of inflation on inflation uncertainty is analyzed using Markov‐switching regressions, where switching between the low and high inflation uncertainty regime is determined via an unobserved Markov process. Results suggest that the 2008 financial crisis and its aftermath have changed the impact of inflation on (1) and (2) across the selected EMU member states. However, a uniform pattern cannot be detected. For some member states, we document a strong link, whereas for others, the impact of inflation on inflation uncertainty is relatively weaker.     

On the real effects of inflation and inflation uncertainty in Mexico

We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies. The main findings are: (1) inflation uncertainty has a negative and significant effect on growth; (2) once the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth; (3) However as predicted by Friedman and Ball, higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth in Mexico is negative. That is, average inflation is harmful to Mexican growth due to its impact on inflation uncertainty. (4) The Mexican Presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth.     

Inflation uncertainty, growth uncertainty, oil prices, and output growth in the UK

This study examines the transmission and response of inflation uncertainty and output uncertainty on inflation and output growth in the UK using a bi-variate EGARCH model. Results suggest that inflation uncertainty has positive and significant effects on inflation before the inflation-targeting period, but that the effect is significantly negative after the inflation-targeting period. On the other hand, output uncertainty has a negative and significant effect on inflation and a positive effect on growth, while oil price rises significantly increase inflation for the UK. Results also indicate that inflation uncertainty significantly reduces output growth before and after the inflation-targeting period. These findings are robust and the Generalized impulse response functions corroborate the conclusions. These results have important implications for an inflation-targeting monetary policy, and for stabilization policy in general.     

货币增长不确定性与通货膨胀不确定性——“波动溢出”假说与实证检验

文章基于通货膨胀——通货膨胀不确定性关系的理论研究,提出货币增长不确定性向通货膨胀不确定性波动溢出的计量检验假说,并利用中国数据,运用多元GARCH模型进行实证检验。结果发现,存在货币增长不确定性显著向通货膨胀不确定性波动溢出的效应。这意味着,货币增长不确定性具有提供有关预测通货膨胀不确定性信息的能力。同时也表明,货币增长不确定性是通货膨胀不确定性的重要解释变量,其重要性不应被忽视。实证结论的政策含义是:减少货币增长不确定性是降低通货膨胀不确定性的重要途径,我国20世纪90年代中后期稳健的货币政策所带来的通货膨胀不确定性显著降低的现实支持了这个观点。     

Inflation targeting in emerging economies: Panel evidence

This paper shows there is no evidence that the inflation targeting regime (IT) improves economic performance as measured by the behavior of inflation and output growth in developing countries. The control of common time effects results in less negative and less significant IT impacts on inflation, inflation volatility and output growth volatility than previously found in the literature. Additionally, our analysis shows robust evidence of lower output growth during IT adoption. On balance, although lower long-run mean inflation signals that the central banks of emerging economies with inflation targeting are more inflation-averse, the costs of disinflation have not been lower than under other monetary regimes.     

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

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.     

The negative side of inflation targeting: revisiting inflation uncertainty in the EMU

ABSTRACT

This article tests the Friedman–Ball hypothesis for the European Monetary Union (EMU) countries, using a GARCH methodology. The empirical results show a positive relationship between inflation and inflation uncertainty, largely supportive of the Friedman–Ball hypothesis. Furthermore, the ECB’s price stability mandate is found to have asymmetric, if not limited, effects on inflation uncertainty since 1999, with the findings different for the so-called peripheral countries when compared to the core. For the majority of the EMU countries, shifts away from the 2% target served to increase inflation uncertainty. The credibility of the ECB since the financial crisis, in attempting to meet its 2% inflation target has seen inflation uncertainty increase for some, likely driven by inflation failing to re-anchor. Furthermore, recent periods of deflation are found to generate inflation uncertainty, with short-term price variability increasing in line with observed negative price growth for the majority of the EMU countries. The results are supportive of a U-shaped relationship between inflation and inflation uncertainty. Using spline techniques, we formally provide support for such a U-shaped relation where inflation uncertainty broadly increases below a certain threshold for each country’s inflation rate. Asymmetric effects across countries are found in the level of this threshold.     

Regime Dependent Effects of Inflation Uncertainty on Real Growth: A Markov Switching Approach

We empirically investigate the effects of inflation uncertainty on output growth for the United States between 1960 and 2012. Modeling output dynamics within a Markov regime switching framework, we provide evidence that inflation uncertainty exerts a negative and regime‐dependent impact on output growth. A battery of sensitivity checks confirm our findings.     

Macroeconomic uncertainty,inflation and growth: Regime-dependent effects in the G7

We analyze the causal effects of real and nominal macroeconomic uncertainty on inflation and output growth by considering whether these effects are cycle phase specific. Employing a bivariate Smooth Transition EGARCH-M model for the G7 countries during 1957–2009, we find strong nonlinearities. First, uncertainty regarding the output growth rate is related with a higher average growth rate mostly in a low-growth regime, supporting the theory of “creative destruction”. Second, higher inflation uncertainty diminishes growth rates, mainly at a high-inflation regime. Finally, real uncertainty has mixed effects on average inflation, while the effect of nominal uncertainty is typically positive, especially so during inflationary periods. Our findings suggest that these relationships are sufficiently complex to require treatment with nonlinear models.     

The impact of inflation targeting: Testing the good luck hypothesis

Starting in the mid‐1980s, the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “good luck hypothesis,” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman‐filter the historical structural shocks consistent with an estimated dynamic stochastic general equilibrium (DSGE) model of the Canadian economy. The estimated shocks are used to build counterfactual histories. The good luck hypothesis can explain only a minor portion of the change in the path and volatility of inflation after the shift in policy. Most of inflation and output stabilization is accounted by the impact on expectations. Unconditionally, the inflation targeting policy does not improve on the previous policy in terms of inflation volatility, but supports a more favourable trade‐off, reducing substantially output volatility.     

Modelling the Link Between US Inflation and Output: The Importance of the Uncertainty Channel

This article employs an augmented version of the UECCC GARCH specification proposed in Conrad and Karanasos (2010) which allows for lagged in‐mean effects, level effects as well as asymmetries in the conditional variances. In this unified framework, we examine the twelve potential intertemporal relationships among inflation, growth and their respective uncertainties using US data. We find that high inflation is detrimental to output growth both directly and indirectly via the nominal uncertainty. Output growth boosts inflation but mainly indirectly through a reduction in real uncertainty. Our findings highlight how macroeconomic performance affects nominal and real uncertainty in many ways and that the bidirectional relation between inflation and growth works to a large extent indirectly via the uncertainty channel.     

Shall One Sit “Longer” for a Free Lunch? Impact of Trading Durations on the Realized Variances and Volatility Spillovers

This study examines the effect of trading durations on the realized variance of rupee futures traded in national stock exchange (NSE), India and Dubai Gold & Commodities Exchange (DGCX), Dubai as there exists a difference in the trading durations at these exchanges, where DGCX has longer trading duration. The empirical results suggest that longer trading duration has significantly higher realized variance, and also non-trading durations at NSE account for higher overall realized variance of Rupee Futures. We model the impact of trading durations on intraday and overnight realized variance for rupee futures and estimate a reduced realized volatility of 40–70 bps due to shorter trading duration. We find that non-trading durations at National Stock Exchange account for 60–70% of the overall realized variance of rupee futures. Using MGARCH model with BEKK parameterization, we find evidence of bidirectional volatility spillover from Offshore to Onshore Rupee markets.

     

THE MISSING LINK BETWEEN INFLATION UNCERTAINTY AND INTEREST RATES

In the literature, there is no consensus about the direction of the effects of inflation uncertainty on interest rates. This paper states that such a result may stem from differentiation in the sources of the uncertainties and analyzes the effects of different types of inflation uncertainties on a set of interest rates for the UK within an interest rate rule framework. Three types of inflation uncertainties – impulse uncertainty, structural uncertainty and steady‐state uncertainty – are derived by using a time‐varying parameter model with a Generalized Autoregressive Conditional Heteroskedasticity specification. It is shown that the impulse uncertainty is positively and the structural uncertainty is negatively correlated with the interest rates. Moreover, these two uncertainties are important to explain short‐term interest rates for the period of inflation targeting era. However, this time, the impulse uncertainty is negatively and the structural uncertainty is positively correlated with the overnight interbank interest rates, which is consistent with the general characteristic of the inflation targeting regimes. Lastly, the evidence concerning the effect of the steady‐state inflation uncertainty on interest rates is not conclusive.     

Regional origins of employment volatility: evidence from German states

Greater openness for trade can have positive welfare effects in terms of higher growth. But increased openness may also increase uncertainty through a higher volatility of employment. We use regional data from Germany to test whether openness for trade has an impact on volatility. We find a downward trend in the unconditional volatility of employment, paralleling patterns for output volatility. The conditional volatility of employment, measuring idiosyncratic developments across states, in contrast, has remained fairly unchanged. In contrast to evidence for the US, we do not find a significant link between employment volatility and trade openness.     

Inflation volatility: A Bayesian approach

The ongoing trend of high inflation across much of the world has reignited interest in inflation volatility with varying foci and methods. In this paper, we employ a Bayesian framework to estimate inflation volatility using a sample of G20 countries. Estimation results suggest persistent heterogeneity in price volatility across time and countries. Furthermore, we use the Bayesian estimates of volatility to conduct several empirical analyses on the implications of interdependence of economies, development status for uncertainty. Further analyses on the determinants of price volatility suggest that trade openness, COVID-19, and the Ukraine crisis have positive impacts on volatility. Additionally, the nature of the political institutions and the share of manufacturing in total national output are also found to affect volatility to some extent.     

The inflation and inflation uncertainty relationship for Turkey: a dynamic framework

This article assesses the interaction between inflation and inflation uncertainty in a dynamic framework for Turkey by using monthly data for the time period 1984–2009. The bulk of previous studies investigating the link between inflation and inflation uncertainty employ Autoregressive Conditional Heteroskedasticity (ARCH)-type models, which consider inflation uncertainty as a predetermined function of innovations to inflation specification. The stochastic volatility in mean (SVM) models that we use allow for gathering innovations to inflation uncertainty and assess the effect of inflation volatility shocks on inflation over time. When we assess the interaction between inflation and its volatility, the empirical findings indicate that response of inflation to inflation volatility is positive and statistically significant. However, the response of inflation volatility to inflation is negative but not statistically significant.     

Macroeconomic Uncertainty and Performance in Asian Countries*

We use a very general bivariate GARCH‐M model and quarterly data for five Asian countries to test for the impact of real and nominal macroeconomic uncertainty on inflation and output growth. We conclude the following. First, in the majority of countries uncertainty regarding the output growth rate is related negatively to the average growth rate. Secondly, contrary to expectations, inflation uncertainty in most cases does not harm the output growth performance of an economy. Thirdly, inflation and output uncertainty have a mixed effect on inflation. Consistent results are found using the VAR‐GARCH‐M approach to investigate the dynamic relationship between inflation and output growth using impulse response functions. This evidence implies that macroeconomic uncertainty may even improve macroeconomic performance, i.e. raise output growth and reduce inflation. Our empirical results highlight important differences with those for industrialized countries.