On the real effects of inflation and inflation uncertainty in Mexico

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We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies. The main findings are: (1) inflation uncertainty has a negative and significant effect on growth; (2) once the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth; (3) However as predicted by Friedman and Ball, higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth in Mexico is negative. That is, average inflation is harmful to Mexican growth due to its impact on inflation uncertainty. (4) The Mexican Presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth.

Original languageEnglish
Pages (from-to)478-500
Number of pages23
JournalJournal of Development Economics
Issue number2
StatePublished - Aug 2006


  • Inflation
  • Inflation uncertainty
  • Latin America
  • Mexico
  • Output growth


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