The Relationship Between Inflation, Output Growth, And Their Uncertainties: Evidence From Selected CEE Countries

In this paper, the authors examine causal relationships among inflation rate, output growth rate, inflation uncertainty and output uncertainty for ten Central and Eastern European transition countries. For this purpose, they estimate a bivariate GARCH model that includes output growth and inflation rates for each country. Then they use conditional standard deviations of inflation and output to proxy nominal and real uncertainty, respectively, and perform Granger-causality tests. The results suggest that inflation rate induces uncertainty about both inflation rate and output growth rate, which is detrimental for real economic activity. On the other hand, they find that output growth rate reduces macroeconomic uncertainty. In addition, they also examine and discuss causal relationships among remaining variables.