On the real effects of inflation and inflation
uncertainty in Mexico
Robin Grier *,Kevin B.Grier
University of Oklahoma,729Elm Avenue,Norman,OK 73071,United States
Received 24April 2004;received in revid form 9December 2004;accepted 28February 2005
Abstract
We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies.The main findings are:(1)inflation uncertainty has a negative and significant effect on growth;(2)once the effect of inflation uncertainty is accounted for,lagged inflation does not have a direct negative effect on output growth;(3)However as predicted by Friedman and Ball,higher average inflation rais inflation uncertainty,and the overall net effect of average inflation on output growth in Mexico is negative.That is,average inflation is harmful to Mexican growth due to its impact on inflation uncertainty.(4)The Mexican Presidential election cycle significantly rais inflation uncertainty both during the year of the election and the year following the election which has correspondingly nega
tive effects on output growth.
grade是什么意思D 2005Elvier B.V .All rights rerved.
JEL classification:054;042;E31
Keywords:Latin America;Mexico;Inflation;Inflation uncertainty;Output growth
1.Introduction阿斯顿英语
The effect of inflation on economic performance is an important and complex topic.It is important,becau if systematic inflation has real effects,governments can influence economic performance through monetary policy.There is little theoretical connsus on 0304-3878/$-e front matter D 2005Elvier B.V .All rights rerved.doi:10.1016/j.jdeveco.2005.02.002
*Corresponding author.Tel.:+14053250581;fax:+14053255842.
E-mail address:rgrier@ou.edu (R.Grier),angus@ou.edu (K.B.Grier).
Journal of Development Economics 80(2006)478–
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R.Grier,K.B.Grier/Journal of Development Economics80(2006)478–500479 how inflation affects economic performance.Much of the empirical literature looks for a negative influence of inflation on g
rowth.Yet many economic theories predict neutrality or even a positive effect of average inflation on economic performance.
Apart from the effect of trend inflation,inflation uncertainty may also influence output growth.As in the ca of average inflation,the effect of uncertainty on growth can either be positive or negative.A further complicating factor is that there may be a relationship between average inflation and the degree of uncertainty about future inflation.That is,it has been argued that higher inflation is less predictable.A well constructed empirical test for the real effects of inflation should consider both average inflation,its predictability,and the potential correlation between the two factors.In this paper,we provide such a test.
Specifically,we investigate the effects of both inflation and inflation uncertainty on output growth in Mexico at business cycle frequencies.We study Mexico becau it is a large,growing economy that is becoming an increasingly significant export market for the United States.1Further,the range of inflation experience is much wider in developing countries in general,and Mexico in particular,than in most rich countries.Developing countries provide a natural laboratory for empirical work on the real effects of inflation and inflation uncertainty and they are the polities most in need of effective inflation policies.
We estimate an augmented multivariate GARCH-M model for inflation and output growth using monthly data from1972to2001.We find that while average inflation does have a net negative effect on output growth,this effect aris from average inflation’s positive effect on inflation uncertainty.That is,we find that inflation uncertainty significantly lowers output growth and,as predicted by Friedman(1977)and Ball(1992), inflation uncertainty is higher at high levels of inflation.The direct effect of average inflation on output growth is estimated to be positive,but this is outweighed by average inflation’s positive effect on inflation uncertainty,which significantly lowers output growth.
We also check for various non-linear effects of average inflation,both on output growth and on inflation uncertainty.While we find little evidence of a direct negative nonlinear effect of average inflation on growth,we do find that an increa in inflation when inflation is high rais uncertainty more than an equal increa in inflation when initial inflation is low.Given uncertainty’s strong negative impact on output growth,this translates to an indirect nonlinear effect of inflation on growth.We find that the threshold level of inflation at which nonlinear effects are the most statistically significant is40%.In all our results we find that any significant negative effect of average inflation on output growth in Mexico operates indirectly through its effect on inflation uncertainty.
Finally,we find that the Mexican Presidential election cycle significantly rais inflation uncertainty bo
th the year of the election and the year after the election.Given the negative and significant effect of inflation uncertainty on output growth,this electorally induced uncertainty also has a deleterious effect on economic performance.
1Economic stability and prosperity in Mexico are also important US policy goals that would ea some pressing problems between the countries,such as illegal immigration.
In what follows below,Section 2summarizes economic theories relating inflation and inflation uncertainty to economic performance.Section 3prents our model,discuss the data,and reports some specification tests.Section 4prents the statistical results,while Section 5discuss the implications of our results.
2.Inflation,uncertainty and economic performance
2.1.Theory
Economic theory can predict either a positive,negative,or zero effect of trend inflation on output growth,depending on the specific assumptions of the model.Tobin (1965)prents a model where inflation reduces accumulated wealth,which in turn rais current savings,investment,and growth.In c套装英文
ontrast,Stockman (1981)shows that in an economy with a cash-in-advance constraint on both consumption and investment,inflation will lower growth.Sidrauski (1967)constructs a model of the super-neutrality of inflation.
Several recent papers u endogenous growth models to develop a rationale for negative growth effects of inflation (Gomme (1993),Jones and Manuelli (1995)).When the models are calibrated and simulated however,the estimated effects of inflation on welfare and growth are relatively small.2
However,there is another,less studied,theoretical link between the inflation process and economic performance.Specifically,veral authors develop models where incread inflation uncertainty affects investment and output growth.Okun (1971)and Friedman (1977)argue informally that incread uncertainty reduces the informativeness of price movements and hinders long-term contracting,thus potentially reducing growth.
More formally,there is an extensive literature on the effects of uncertainty on investment.As Caballero (1991)notes,the structure of the model determines whether the effect of uncertainty will be negative or positive.With risk aver firms,the effect is negative (Craine (1989)),with competitive firms and symmetric (quadratic)adjustment costs,the effect of uncertainty is positive (Hartman (1972),Abel (1983)).3
Recently,much attention has been focusd on the ca of postponable,but irreversible,investment,which is to say the ca of asymmetric adjustment costs.Several papers u this ca to generate a negative link between uncertainty and investment.4In the models,the decision to invest is viewed as an option.Firms can exerci the option by investing,or can delay the investment but continue to hold the option.This approach modifies the familiar positive net prent value rule for evaluating investments by taking into account the effect of uncertainty on the value of the option.Greater uncertainty rais the option 2
Haslag (1997)reviews the and other papers in some detail.
3Caballero shows that this positive result is due more to the assumptions of constant returns and perfect competition than to the assumption of symmetric adjustment costs.
英文好听的名字4The main papers in this area are Cukierman (1980),Bernanke (1983),McDonald and Siegel (1986),Pindyck and Solimano (1993)and Dixit and Pindyck (1993).The discussion in the paragraph below follows Pinkyck and Solimano.R.Grier,K.B.Grier /Journal of Development Economics 80(2006)478–500
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R.Grier,K.B.Grier/Journal of Development Economics80(2006)478–500481 value of waiting,in that it rais the required rate of return on current investment projects, causing some of them to be postponed.5
However,Doty and Sarte(2000)u a cash-in-advance model to show that inflation variability has a positive effect on economic growth through incread savings.Risk aver agents will tend to save more during periods of uncertainty.This extra pool of savings will then translate via higher investment into higher GDP growth.
Finally,there is the potential complication that higher average inflation may rai inflation uncertainty.This possibility is raid by Friedman(1977)and formalized by Ball (1992).In Ball’s model,the public does not know the preferences of the policy maker,but uncertainty about the policymakers’preferences only affects inflation uncertainty when inflation is high.The idea is that at a low level of inflation,both types of policymakers in the model will tend to accept the existing rate,while at a high level of inflation,one type of policymaker may initiate a stabilization program and the other type may not.
老友记第九季If average inflation is correlated with inflation uncertainty,and both variables in theory affect output gr
owth,then excluding either one will tend to produce a biad estimate of the coefficient of the included variable.Further,a simple GARCH conditional variance equation cannot capture this relationship,so some modification must be made to accommodate or test this view.To our knowledge,there are no existing tests of the effects of inflation on output growth that incorporate all three of the potential relationships reviewed here.
2.2.Empirical studies of inflation,inflation uncertainty,and growth
The theoretical ca that inflation uncertainty affects output growth is at least as strong as the ca for average inflation.However,few empirical papers include uncertainty measures along with average inflation in tests of inflation’s effect on output growth.Tho that do often u a simple volatility variable as their measure of uncertainty.For example, Grier and Tullock(1989)show in a broad sample of countries from1960to1980that inflation volatility,and not the level or the change of inflation,is what significantly lowers growth.Judson and Orphanides(1999),using annual data from1960to1992for a wide group of countries,find that both inflation and inflation uncertainty lower growth.Clark (1997),however,shows that neither average inflation nor inflation volatility is robustly related to economic growth.One problem with using volatility as a measure of uncertainty is that a variable may be both volatile and predictable.That is,volatility probably systematically overstates the
level of uncertainty.
Others u survey data to create a measure of uncertainty.Here the dispersion of individual forecasts is ud as the measure of inflation uncertainty.Holland(1993)surveys veral papers which u this technique and reports that all of them find a negative relationship between this measure of inflation uncertainty and economic performance. However,variations in the dispersion of individual forecaster’s point estimates over time
5Note however,that Abel and Eberly(1999)argue that this literature only addresd part of the how uncertainty and irreversibility combine to rai the threshold for investment.They study the long run evolution of the capital stock and show that the sign for the effect of incread uncertainty on that variable is ambiguous.
may have little to do with fluctuations in uncertainty.It is easily possible that each forecaster has a large confidence interval on his or her estimate,but the group’s individual point estimates show little dispersion.What would be desired is the confidence interval each forecaster places on her point estimate.
A third approach us GARCH-in-Mean models to investigate the real effects of uncertainty.This met
hod us the conditional variance of inflation as the measure of inflation uncertainty.Specifically,Coulson and Robins (1985)find a positive association between this measure of inflation uncertainty and US economic performance while Jann (1989)finds no significant relationship.Grier and Perry (2000)and Grier et al.(2004)both report a negative relation between inflation uncertainty and growth in the US.
The multivariate GARCH-M approach has the advantage that one estimates the uncertainty measure and its effects together in a simultaneous model.In addition,since the conditional variance is just the variance of the one step ahead forecasting error,the GARCH model ems like a natural choice to study the effects of uncertainty.However,none of the GARCH bad papers allows average inflation to affect the conditional variance of inflation as we do in our empirical work.
Finally,there is an empirical literature on the nonlinear effects of inflation on output growth that is related to our work.Papers by Fischer (1993),Sarel (1996),Bruno and Easterly (1998),Burdekin et al.(2000),and Khan and Senhadji (2001)all find that the effect of inflation on output growth varies with the level of inflation.Since our GARCH measure of uncertainty is a non-linear combination of past inflation innovations,there is a link between their work and ours.We will investigate the possibility of non-linear effects of average inflation on output growth in a model that also accounts for the effect of
化妆需要什么>rejectinflation uncertainty.
3.A statistical model of inflation and output growth
Our purpo in this paper is to investigate the relationship between the conditional means and conditional variances of inflation and output growth in Mexico.Our ba model for explaining the conditional means of the two ries is a V AR type model,where lags of inflation and output growth explain inflation and output growth.We simultaneously estimate a time-varying variance covariance matrix,allowing the conditional variances to affect the conditional means.However,using a pure V AR-GARCH-M model would miss some potentially important causal factors,namely the importance of the US economy and oil prices for Mexican economic performance,the possible impact of budget deficits on inflation,and the effect of political events on the Mexican economy.
While NAFTA has heightened the n of the importance of US economic growth for Mexican growth,the US has long been an important export market for Mexico.Popular analys invariably point to US economic conditions as a major determining factor of Mexican economic performance.6In addition,domestic budget deficits are potentially 6
This view is captured in the aphorism b When the US sneezes,Mexico catches a cold.Q Or as Porfiri
o Diaz once said b Pity poor Mexico,so far from God,so clo to the United States.Q R.Grier,K.B.Grier /Journal of Development Economics 80(2006)478–500
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R.Grier,K.B.Grier/Journal of Development Economics80(2006)478–500483 correlated with inflation or growth,due to the possibility of financing deficits with inflation or the potential stimulus from fiscal expansions.Mexico also is an important oil exporter and thus one should allow for the(positive)effects of oil price changes on Mexican economic performance.
Finally,the Mexican economy is cloly tied to its own domestic politics.Even though Mexico was virtually a one-party state until the year2000,presidential turnovers,which occur every6years,are often associated with economic upheaval.Grier and Grier(2000), Gonzalez(2000)and Whitehead(1990)all report evidence of a significant political business cycle in modern Mexico.
In order to capture the above factors,we will estimate an augmented GARCH-M model.We begin by determining the order of integration of the data ries and then testing for the existence of conditional heteroskedasticity in the data.We u asonally adjusted monthly data from1972.01to2001.12on Mexican consumer prices and industrial production,both of which are from
the IMF’s International Financial Statistics CD-ROM.7 Data on Mexican budget deficits from1974.1to2001.12are also from the IMF CD,while data on US industrial production and oil prices are taken from the St.Louis Federal Rerves b FRED Q online databa.
3.1.Order of integration
immortality
In the ca of industrial production,we test to e whether the level of the ries is trend stationary or I(1).In the ca of the price level,we test to e whether or not the inflation rate is stationary or I(1).Here we consider3different tests:(1)the Augmented Dickey Fuller(ADF)test with the lag length determined by the AIC criterion,(2)the Phillips–Perron test,and(3)the Kwiatkowski,Phillips,Schmidt,and Shin(KPSS)test.The first two tests have non-stationarity as their null hypothesis while the KPSS test us the null of stationarity.In ca of disagreement,we will side with the majority view.
Table1prents the results of our stationarity tests for inflation,the level and growth of industrial production in Mexico and the US,Mexico’s real budget deficit, and oil prices.In the ca of Mexican industrial production the ADF and KPSS tests indicate non-stationarity while the PP test implies(trend)stationarity.However,the growth rate of Mexican industrial production is stationary acco
rding to all three tests. US industrial production is non-stationary in the levels but stationary in the growth rate according to all three tests.Oil prices and budget deficits are less clear cut.In the ca of oil,all three tests imply the level is non-stationary,but the ADF and PP tests 7The ries were asonally adjusted using the multiplicative adjustment procedure provided in EVIEWS. Note that the data are collected and reported at a monthly frequency,so that estimating models using data at lower frequencies(quarterly or annually)involves averaging or even discarding some information without gaining a longer sample,at least in the ca of quarterly data.It is the span of the sample more than the frequency of the data that determines what kind of long run information we can get from a data t.In this ca we have almost30years.However,using a quarterly sample,with the data sampled at the end of each quarter,does not materially change any of our key results and we will report some parallel quarterly results informally throughout the paper.
