Money growth uncertainty, inflation uncertainty and real output growth: Empirical evidence

The attention given to the impact of inflation uncertainty on real economic variables such as real output and unemployment has been growing since Okun (1971) and Friedman (1977) hypothesized a positive relationship between the mean of inflation and inflation uncertainty, and a negative relationship between inflation uncertainty and real economic activity.;Many researchers have been involved in investigating the hypotheses through empirical study since then. However, the existing empirical studies provide only mixed support for the hypotheses. As an alternative, we observed the hypothesized relationship between monetary uncertainty and real economic movement because price series might be noisier than monetary aggregates such as M1 and M2 due to experiences of supply shocks such as the oil price shock and institutional rigidities and sluggish adjustments of prices and wages via increases in uncertainty.;We examined the empirical relationship between monetary uncertainty, inflation, and real output for fifteen OECD countries by defining uncertainty term as a nonoverlapping moving average standard deviation in the second chapter. We employed ARCH-M and GARCH-M models which provide a parametric specification of the time varying conditional variance for the stochastic error in the prediction equation to investigate the hypotheses for the United States.;First, we found that the empirical results from the estimation of GARCH-M model of GDP, GDP deflater, and M1 of the United States did provide support on our claim that monetary uncertainty instead of inflation uncertainty negatively affects real output growth, while the empirical results from the other models failed to do so. Consequently, neither the monetary aggregates nor inflation series used in this study did not seem to provide a robust measure of the direct policy influence on real variables for the policy maker in both studies.;Secondly, allowing parameters of the money growth equation in the ARCH-M and GARCH-M model to exhibit discrete changes at the third quarter of 1979 and 1982 brings richer specification for capturing deterministic shifts in the monetary regime.