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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

  • Conrad Christian

    ()
    (Department of Economics, University of Mannheim)

  • Karanasos Menelaos

    ()
    (Business School, Brunel University)

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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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 9 (2005)
Issue (Month): 4 (December)
Pages: 1-38

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Handle: RePEc:bpj:sndecm:v:9:y:2005:i:4:n:5

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Cited by:
  1. Conrad, Christian & Karanasos, Menelaos, 2006. "The impulse response function of the long memory GARCH process," Economics Letters, Elsevier, vol. 90(1), pages 34-41, January.
  2. Fountas, Stilianos & Karanasos, Menelaos, 2007. "Inflation, output growth, and nominal and real uncertainty: Empirical evidence for the G7," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 229-250, March.
  3. Karanasos, M. & Kartsaklas, A., 2009. "Dual long-memory, structural breaks and the link between turnover and the range-based volatility," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 838-851, December.
  4. Caporale, Guglielmo Maria & Paesani, Paolo & Onorante, Luca, 2010. "Inflation and inflation uncertainty in the euro area," Working Paper Series 1229, European Central Bank.
  5. J. Kim & A. Kartsaklas & M. Karanasos, 2005. "The volume–volatility relationship and the opening of the Korean stock market to foreign investors after the financial turmoil in 1997," Asia-Pacific Financial Markets, Springer, vol. 12(3), pages 245-271, September.
  6. Guglielmo Maria Caporale & Alexandros Kontonikas, 2006. "The Euro and Inflation Uncertainty in the European Monetary Union," CESifo Working Paper Series 1842, CESifo Group Munich.
  7. Mahadevan, Renuka & Suardi, Sandy, 2011. "The effects of uncertainty dynamics on exports, imports and productivity growth," Journal of Asian Economics, Elsevier, vol. 22(2), pages 174-188, April.
  8. Fountas, Stilianos & Karanasos, Menelaos, 2006. "The relationship between economic growth and real uncertainty in the G3," Economic Modelling, Elsevier, vol. 23(4), pages 638-647, July.
  9. Menelaos Karanasos & Stefanie Schurer, 2008. "Is the Relationship between Inflation and Its Uncertainty Linear?," German Economic Review, Verein für Socialpolitik, vol. 9, pages 265-286, 08.
  10. Conrad, Christian, 2010. "Non-negativity conditions for the hyperbolic GARCH model," Journal of Econometrics, Elsevier, vol. 157(2), pages 441-457, August.
  11. Meller, Barbara & Nautz, Dieter, 2012. "Inflation persistence in the Euro area before and after the European Monetary Union," Economic Modelling, Elsevier, vol. 29(4), pages 1170-1176.
  12. Meller, Barbara & Nautz, Dieter, 2009. "The impact of the European Monetary Union on inflation persistence in the euro area," Discussion Papers 2009/8, Free University Berlin, School of Business & Economics.

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