Dynamic Linkages and Volatility Transmissions between Macroeconomic Uncertainty and Performance: Evidence from South Asian Countries

Abstract

In this article, we examine the time-varying linkages and volatility transmissions between macroeconomic uncertainty and macroeconomic performance in four South Asian countries over the last 20–30 years. Through the lens of bivariate GARCH family models supplemented with two-step procedure, we arrive at several important conclusions. First, there is an overwhelming support for the Friedman–Ball hypothesis that higher inflation leads to inflation uncertainty in all countries. Second, Holland’s idea of negative influence of inflation volatility on the level of inflation holds only for one country (India). Third, there is no significant effect of macroeconomic uncertainty on the output growth in all countries under study, where real uncertainty induces inflation but impedes output growth, except in India. Fourth, output growth leads to decline real uncertainty in all countries except Sri Lanka and improves (reduces) inflation uncertainty in India (Bangladesh) only. Fifth, there is a statistically significant bidirectional causality between real and nominal uncertainties for at least half of the countries. Finally, there is an adverse effect of higher inflation on the output growth for Pakistan. We suggest that policymakers in these countries should pay more attention to expectations formation and should adopt dynamic monetary stabilization and inflation-targeting strategies, coupled with sustainable growth measures, for reducing macroeconomic volatilities.