Effects of Inflation on Output Gap: A MRS-IV Approach

Caglayan M., KANDEMİR KOCAASLAN Ö., Mouratidis K.

REVIEW OF ECONOMIC ANALYSIS, cilt.7, sa.1, ss.3-23, 2015 (ESCI) identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 7 Sayı: 1
  • Basım Tarihi: 2015
  • Dergi Adı: REVIEW OF ECONOMIC ANALYSIS
  • Derginin Tarandığı İndeksler: Emerging Sources Citation Index (ESCI), Scopus
  • Sayfa Sayıları: ss.3-23
  • Hacettepe Üniversitesi Adresli: Evet

Özet

In this paper, we propose an analytical framework to explore the level and volatility effects of inflation on the output gap. Using quarterly US data over 1977:q2-2009:q4, we examine the empirical implications of the model by implementing an instrumental variables Markov regime switching approach. We show that inflation uncertainty has a negative and regime dependent impact on the output gap but the level of inflation does not have any such effect. Our empirical investigation also provides evidence that the US economy was moving towards a period of turmoil before the recent financial crisis was imminent. The results are robust to the use of alternative measures of inflation uncertainty.