Effect of inflation uncertainty, output uncertainty and oil price on inflation and growth in Australia

Abstract

PurposeThe purpose of this paper is to determine the relationship between inflation, inflation uncertainty, growth and growth uncertainty for Australia.Design/methodology/approachMultivariate EGARCH models has been used to estimate the relationship between inflation, inflation uncertainty, growth and growth uncertainty for Australia.FindingsUsing quarterly data in multivariate EGARCH models, this study finds that both inflation uncertainty and output uncertainty have negative and significant effects on output growth. The paper also finds that, while inflation uncertainty has a positive and significant effect on inflation, output uncertainty has a negative and significant effect on inflation. The study uses a newly constructed oil price dummy as a control variable and finds that oil price changes significantly increase inflation uncertainty. The study also finds that inflation uncertainty and the inflation level have both declined since the adoption of a formal inflation‐targeting monetary policy in Australia.Research limitations/implicationsMultivariate EGARCH model can be used to estimate the effects of inflation, inflation uncertainty, growth and growth uncertainty for cross‐country analysis.Originality/valueThis is the first study of the effect of inflation uncertainty and growth uncertainty on inflation and growth in Australia using a newly constructed oil price dummy in a multivariate EGARCH framework.