The inflation-growth nexus

The paper explores bilateral relationship between the inflation-growth rate and uncer­tainty. The data consist of Korea monthly inflation and real growth rates of 475 observations from January 1974 through July 2014. VARMA(p,q)-M-Asymmetric GARCH(p',q') with lagged dependent variables are employed. The paper finds useful results about the dynamic relation­ship between inflation rates and growth rates affecting their uncertainties and vice versa to shed further light on Friedman's hypothesis. Supporting evidence for Friedman’s hypothesis that high uncertainty leads to higher inflation rate but not vice versa was found in multivariate mod­els. The uncertainties of inflation and output were found to be higher for the periods of high inflation and low growth in Korea. The uncertainty of inflation contributed to the growth to some degree while it caused the higher inflation. The uncertainty of output invoked low growth while it did not have much impact on inflation. The result would be helpful for the financial institutions and individual investors to establish the strategy for hedge against inflation or aggressive growth investment.