Dynamic Relationship between Inflation Uncertainty and Private Investment in Iran: An Application of VAR-GARCH-M Model

This paper empirically investigates the relationship between CPI inflation uncertainty, and private investment in the Iranian economy from ۱۹۸۸ to ۲۰۱۰ by using quarterly data. We employ a bivariate VAR(۵)-GARCH(۱,۱)-in-mean with diagonal BEKK model to discover in a unified framework how are the interactions between the variables. In the model, conditional variance of inflation and private investment are interpreted as inflation and private investment uncertainties, respectively. Our empirical finding shows that, ۱) there are bidirectional mean spillovers between inflation and private investment, ۲) private investment uncertainty affects private investment negatively, ۳) private investment uncertainty doesn’t affect inflation, ۴) inflation uncertainty affects inflation positively, and ۵) inflation uncertainty affects private investment negatively, supporting Pindyck (۱۹۸۲, ۱۹۸۸, ۱۹۹۱), Caballero (۱۹۹۱), Ferderer (۱۹۹۳a), Caballero and Pindyck (۱۹۹۶).

Keywords:

Inflation Uncertainty , Private Investment Uncertainty , Bivariate GARCH Model