The Effects of Uncertainty on Macroeconomic Performance in Iran: Evidence from a VARMA, MVGARCH-M Model

The impact of both nominal (inflation) and real (output growth) macroeconomic uncertainty on economic performance is one of the major and complex issues. Costs of high inflation and inflation uncertainty have irreversible and adverse effects on the economy and welfare of the society. Over time, apart from inflation, inflation uncertainty may also affect productivity growth. As inflation uncertainty, output growth uncertainty can also be of positive or negative effect on growth. This study investigates the relationship between inflation, inflation uncertainty, output growth and output growth uncertainty in Iran using quarterly data from 1990:2 to 2012:1. In doing so, a bivariate VARMA, MVGARCH-M is used, and the estimation method is quasi maximum likelihood. The results show that output growth uncertainty has a negative and significant effect on the growth and positive and significant effect on inflation. On the other hand, inflation uncertainty has had a positive and significant effect on inflation over the period, but its effect on output growth has not been significant. Also, the conditional variance–covariance process underlying the output growth inflation exhibits significant non-diagonality and asymmetry.