Relationship between Real and Nominal Uncertainty in Pakistan

Muhammad Jamil and Sumbal Majeed

Abstract

The paper explores the link between inflation and output growth variability in Pakistan. The study uses quarterly data for the period 1980:1 to 2010:2. The paper employs Bivariate GARCH (BEKK) model to simultaneously estimate conditional variances of output growth and inflation and covariance between them. The conditional variances of output growth and inflation are used as indicators of real and nominal uncertainty in the present study. It is also found that higher inflation is responsible for creating uncertainty about inflation in Pakistan, and this higher inflation uncertainty impacts economic growth negatively in Pakistan. Granger causality results show unidirectional causality from inflation to inflation volatility, output growth to output growth volatility, and inflation volatility to output growth. This indicates that both higher growth and higher inflation uncertainty are responsible for increasing growth uncertainty in Pakistan.