The Inflation-Output Variability Relationship in the CEE countries: A Bivariate GARCH Model

• Název práce v češtině: Vzťah variability inflácie a produkcie v krajinách strednej a východnej Európy: ; dvojrozmerný GARCH model
• Název v anglickém jazyce: The Inflation-Output Variability Relationship in the CEE countries: ; A Bivariate GARCH Model
• Klíčová slova: inflácia, rast produkcie, variabilita, neistota, GARCH, region strednej a východnej Európy, kauzálne efekty, Grangerova kauzalita, kríza
• Klíčová slova anglicky: inflation, output growth, variability, uncertainty, GARCH, CEE, causal effect, Granger causality, crisis
• Akademický rok vypsání: 2013/2014
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. František Čech, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 18.06.2014
• Datum zadání: 18.06.2014
• Datum a čas obhajoby: 23.09.2015 00:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 27.07.2015
• Datum proběhlé obhajoby: 23.09.2015
• Oponenti: RNDr. Michal Červinka, Ph.D.

Předběžná náplň práce

Motivation:
One of the most popular macroeconomics issues is the relationship between the inflation and the output. This relationship is traditionally represented by the Phillips curve. Significant discussions among the economists are about the existence of the long-run trade-off or even whether the trade-off exists at all. The topic is still important for policy makers who are trying to determine the suitable monetary policies.

While the previous research was mainly based on the levels relationship, in the last years the new approach to this trade-off appeared. According to Taylor (1994), it is more beneficial to study the variability relationship between inflation and output growth then their levels relationship. Lee (1999) argues that if there is a shock to the aggregate demand, the effort to keep the inflation stable could lead to the fluctuations in the output. Hasanov and Omay (2010) show that what affects the output growth rate are the uncertainties both nominal (from inflation rate) and real (output uncertainties). Therefore, I decided to study and estimate the relationship between the variability of the inflation and of the output for the countries in the Central and Eastern European region, and the effect of the inflation rate uncertainty on the output growth as well. I will also study whether the recent crisis affected this relationship.

Hypotheses:
1. Hypothesis #1: There exists the variability relationship between the inflation and output.
2. Hypothesis #2: Inflation rate affects inflation rate uncertainty and inflation rate uncertainty affects output growth.
3. Hypothesis #3: Recent economic crisis did not affect this relationship.

Methodology:
The econometric framework for the estimation of the variability relationship will be Vector Autoregression for mean estimates and bivariate GARCH model for volatility estimates as suggested by Lee (1999). Various GARCH specifications will be applied, such as BEKK or CCC. The results will be compared using Akaike information criterion to select the best specification. The inflation uncertainty will be proxied, as suggested by Hasanov and Omay (2010), by using conditional variances of GARCH estimates. Moreover, Granger Causality test will be used to determine the causal relationships between the variables.

In order to estimate the proposed models, I will use (preferably) monthly data of the Consumer Price Index (CPI) to get the inflation, and monthly data of the Industrial Production Index (IPI) as a proxy to the nominal output. These data will be obtained from statistical databases such as Eurostat or OECD statistics.
Expected Contribution:
The diploma thesis could bring new evidence on the inflation-output variability relationship for CEE countries. Also, by using the latest data available (up to year 2014) it can show whether the recent economic depression affected this relationship.

Outline:
1. Introduction
2. Literature review
3. Inflation and Output in the CEE countries
4. Methodology of Empirical research
5. Data description
6. Empirical results
7. Conclusion

Core Bibliography:
Apergis, N., 2004. Inflation, output growth, volatility and causality: evidence from panel data and the G7 countries. Economic Letters, Issue 83, pp. 185-191.

Conrad, C. and Karanasos, M., 2008. Negative Volatility Spillovers in the Unrestricted ECCC-GARCH Model. KOF Working Papers No. 189.

Conrad, C. and Karanasos, M., 2008. Modeling Volatility Spillovers between the Variabilities of US Inflation and Output: the UECCC GARCH Model. Discussion Paper Series No. 475.

Conrad, C., Karanasos, M. and Zeng, N., 2009. The link between macroeconomic performance and variability in the UK. Economics Letters, Issue 106, No. 3, pp. 154-157.

Hasanov, M. and Omay, T., 2010. The relationship between inflation, output growth, and their uncertainties: Evidence from selected CEE countries. MPRA Paper No. 23764.

Lee, J., 1999. The inflation and output variability tradeoff: evidence from a GARCH model. Economic Letters, Issue 62, pp. 63-67.

Taylor, J. B., 1994. The inflation/output variability trade-off revisited. Conference Series; [Proceedings], Federal Reserve Bank of Boston, Issue 38, pages 21-24.