The relationship between uncertainty and macroeconomic variables: The case of Turkey

The relationship between macroeconomic variables and their uncertainties have been often debated in both theoretical and empirical literature recently. However, there is no consensus on the direction of the causality among these variables in theory. On the other hand, it is generally accepted that the main purpose of economic policies is maintaining low and stable inflation with sustainable growth. In this regard, the analysis of the relationship between growth, inflation and their uncertainties is a crucial topic. Particularly developing countries encounter more uncertainty than developed countries. In this study, the relationship among inflation and growth and their uncertainties are analyzed for a developing country: Turkey. First, the uncertainties of inflation and growth have been estimated simultaneously in a linear framework by bivariate GARCH method. Afterwards, bivariate GARCH method which takes into account the potential non linear relationships has been used. In this way, for the first time in this study the mentioned relationships are analyzed considering the possible nonlinearities for Turkey. Based on the results of estimations, the causality relation between the variables and their uncertainties have been examined. According to findings, the uncertainties of inflation and growth are effective on inflation and growth. To illustrate, when there is no regime distinction, the growth and inflation uncertainties increase the inflation and growth. With a regime distinction, on the other hand, we see that the casual relationship between growth uncertainty and inflation exists only in the high inflation regime. Consequently, in this study the relationship between macro variables and their uncertainties has been analyzed with a wider perpective.