Inflation, Output Growth, and Their Uncertainties: Empirical Evidence for a Causal Relationship from European Emerging Economies

Abstract

In this paper, we analyze the causality among inflation, output growth, and their uncertainties in all European countries with emerging economies. For these countries, high uncertainty regarding economic growth during the current economic and financial crisis that started in 2008 caused their governments to increase their efforts to sustain growth, and to maintain a low level of inflation. Of the twelve possible hypotheses regarding the causal relationships among inflation, output growth, and their uncertainties, we consider five relationships for which we find strong theoretical arguments and empirical evidence in the literature. The empirical evidence strongly supports the Friedman-Ball hypothesis that inflation Granger-causes inflation uncertainty. For the other four tested hypotheses, fewer significant causal relationships are obtained.

Keywords:

• European emerging economies
• heteroskedastic model
• inflation
• output growth
• uncertainty