Abstract
This paper observes the dynamic associations among inflation, output growth for
Pakistan, Indonesia and Iran with their uncertainties. We use various GARCH models to
estimate the conditional variances that are used as proxies for creating uncertainties of
output growth and inflation. Finally, we use bi-variate ARMA (p,q)-GARCH-M (1,1)
models with diagonal BEKK specification to find the twelve causal relationships
between inflation, its uncertainty vs output growth with its uncertainty. Our evidence
supports numeral of important conclusions. Firstly, we find that Friedman (1977)
hypothesis, i.e., inflation clues to increase the uncertainty of inflation, which is not
supported in both Pakistan and Iran but not for Indonesia. Secondly, Cukierman-Meltzer
(1986) hypothesis is accepted in Pakistan and Holland (1995) hypothesis is accepted in
Indonesia and Iran. Thirdly, Black (1987) hypothesis is accepted in Pakistan and Iran
whereas, Deveraux (1989) hypothesis is accepted in Indonesia. We also discover that
higher output growth causes to reduce the inflation in both Pakistan plus Indonesia.
Higher inflation reduces output growth in both Pakistan and Indonesia but not in Iran.
We also conclude that the policy makers of these countries may take measures to reduce
inflation rate because output growth is inversely linked with inflation and the prevailing
uncertainty in the economy.
Saira Rasul, Himayatullah Khan, Arshad Ali Bhatti. (2016) The Inflation–Output Nexus: Empirical Evidence from Pakistan, Indonesia and Iran, The Journal of Humanities & Social Sciences, Volume-24, Issue-2.
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