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Dual Long Memory in Inflation Dynamics across Countries of the Euro Area and the Link between Inflation Uncertainty and Macroeconomic Performance

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Author Info
Christian Conrad (Department of Economics, University of Mannheim)
Menelaos Karanasos (Business School, Brunel University)

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Abstract

This paper analyzes the inflation dynamics of several countries belonging to the European Monetary Union and of the UK. We estimate the two main parameters driving the degree of persistence in inflation and its uncertainty using a dual long memory process. We also investigate the possible existence of heterogeneity in inflation dynamics across Euro area countries and examine the link between nominal uncertainty and macroeconomic performance measured by the inflation and output growth rates. Strong evidence is provided for the hypothesis that increased inflation raises nominal uncertainty in all countries. However, we find that uncertainty surrounding future inflation has a mixed impact on output growth. This result brings out an important asymmetry in the transmission mechanism of monetary policy in Europe in addition to the difference in the economic sizes of the countries. We also investigate whether one can find a correlation between central bank independence and inflation policy. Our conclusion is that the most independent central banks are in countries where inflation falls in response to increased uncertainty.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 9 (2005)
Issue (Month): 4 ()
Pages: 1147-1147
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Handle: RePEc:bep:sndecm:9:2005:4:1147-1147

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Related research
Keywords: Central bank independence dual long memory Euro area Granger-causality tests inflation uncertainty monetary policy.

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guglielmo Maria Caporale & Alexandros Kontonikas, 2006. "The Euro and Inflation Uncertainty in the European Monetary Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  2. Menelaos Karanasosa & Stefanie Schurer, 2007. "Is the Relationship Between Inflation and its Uncertainty Linear?," Ruhr Economic Papers 0018, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  3. Christian Conrad, 2007. "Non-negativity Conditions for the Hyperbolic GARCH Model," Working papers 07-162, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
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