By: Rasul, S., Bhatti, A. A. Khan, H. & Jabeen, M.
This paper examines the dynamic relationships among inflation, output growth and their uncertainties for Pakistan and India for the period 1982-M4 to 2012-M12. We use various GARCH models to estimate the conditional variances that are used as proxies for the uncertainties of inflation and output growth. Finally, we use the bi-variate ARMA (p,q)-GARCH-M (1,1) models with diagonal BEKK specification to find the twelve causal relationships among inflation, output growth and their uncertainties. Our evidence supports the number of important conclusions. Firstly, we find that Friedman (1977) hypothesis, i.e., inflation leads to increase the inflation uncertainty is not supported in both Pakistan and India. Secondly, Cukierman-Meltzer (1986) hypothesis is accepted in Pakistan and Holland (1995) hypothesis is accepted in India. Thirdly, Black (1987) hypothesis is accepted in Pakistan and Deveraux (1989) hypothesis is accepted in India. We also find the strong relationship that higher output growth reduces the inflation in both India and Pakistan. We also conclude that the policy makers of both countries may take measures to reduce inflation rate because output growth is inversely related to inflation and the prevailing uncertainty in the economy.
This paper examines the dynamic relationships among inflation, output growth and their uncertainties for Pakistan and India for the period 1982-M4 to 2012-M12. We use various GARCH models to estimate the conditional variances that are used as proxies for the uncertainties of inflation and output growth. Finally, we use the bi-variate ARMA (p,q)-GARCH-M (1,1) models with diagonal BEKK specification to find the twelve causal relationships among inflation, output growth and their uncertainties. Our evidence supports the number of important conclusions. Firstly, we find that Friedman (1977) hypothesis, i.e., inflation leads to increase the inflation uncertainty is not supported in both Pakistan and India. Secondly, Cukierman-Meltzer (1986) hypothesis is accepted in Pakistan and Holland (1995) hypothesis is accepted in India. Thirdly, Black (1987) hypothesis is accepted in Pakistan and Deveraux (1989) hypothesis is accepted in India. We also find the strong relationship that higher output growth reduces the inflation in both India and Pakistan. We also conclude that the policy makers of both countries may take measures to reduce inflation rate because output growth is inversely related to inflation and the prevailing uncertainty in the economy.
