The Impact of Inflation Uncertainty on Output Growth and Inflation in Thailand

Abstract: We explore the impact of inflation uncertainty on output growth in Thailand, an
emerging market economy with moderate inflation. Inflation and output uncertainty are
modeled in a bivariate constant conditional correlation generalized autoregressive
conditional heteroskedastic (AR(p)-cccGARCH(1,1)) specification. We include the
exchange rate in the mean equations, and use the headline and core inflation rates and
industrial production to generate inflation and output uncertainty series. These series are
then used in Granger causality tests to make inferences about the effect of monetary
policy-induced inflation uncertainty. Causality tests show a positive relation from
inflation to inflation uncertainty. Additionally, increased inflation uncertainty decreases
output. These results are consistent with real costs associated with moderate inflation.
Finally, we find no evidence that monetary policy reduced these costs.

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