Uncertainty Channel between Inflation and Output Growth in Japan and Korea

Uncertainty Channel between Inflation and Output Growth in Japan and Korea

Bivariate ARFIMA and ARMA-GARCH-M models are used to explain the relationship between uncertainty and average outcomes for inflation and output growth. To analyze the quantitative importance, the effect of an inflation (output) surprise on inflation (output growth) uncertainty, average inflation and output growth were considered. Empirical results show different effects of uncertainty on inflation and growth. For the Japanese economy empirical results provide strong empirical confinnation of Friedman s hypothesis. Bivariate ARFIMA-GARCH-M model also provides a statistical support for Cukiennan and Meltzer s, Deveraux s, and Black s are all statistically significant, but the coefficients for Deveraux s and Black s are negative. For the Korean economy from ARFIMA-GARCH-M models, the Friedman and Deveraux s hypotheses do hold, but two other hypotheses do not obtain statistical support.