Modeling the link between US inflation and output: the importance of the uncertainty channel

This paper employs an augmented version of the UECCC GARCH specificationproposed in Conrad and Karanasos (2010) which allows for lagged in-mean effects,level effects as well as asymmetries in the conditional variances. In this unifiedframework we examine the twelve potential intertemporal relationships between inflation,growth and their respective uncertainties using US data. We find that highinflation is detrimental to output growth both directly and indirectly via the nominaluncertainty. Output growth boosts inflation but mainly indirectly through areduction in real uncertainty. Our findings highlight that macroeconomic performanceaffects nominal and real uncertainty in many ways and that the bidirectionalrelation between inflation and growth works to a large extend indirectly via theuncertainty channel.[...]