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Evaluating the effect of monetary policy on unemployment with alternative inflation forecasts

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  • Altavilla, Carlo
  • Ciccarelli, Matteo

Abstract

This paper explores the role that inflation forecasts play in the uncertainty surrounding the estimated effects of alternative monetary rules on unemployment dynamics in the euro area and the US. We use the inflation forecasts of 8 competing models in a standard Bayesian VAR to analyse the size and the timing of these effects, as well as to quantify the uncertainty relative to the different inflation models under two rules. The results suggest that model uncertainty can be a serious issue and strengthen the case for a policy strategy that takes into account several sources of information. We find that combining inflation forecasts from many models not only yields more accurate forecasts than those of any specific model, but also reduces the uncertainty associated with the real effects of policy decisions. These results are in line with the model-combination approach that central banks already follow when conceiving their strategy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 1 (January)
Pages: 237-253

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:1:p:237-253

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Inflation forecasts Unemployment Impulse response analysis;

References

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Cited by:
  1. Carlo Altavilla & Matteo Ciccarelli, 2011. "Monetary Policy Analysis in Real-Time. Vintage Combination from a Real-Time Dataset," CESifo Working Paper Series 3372, CESifo Group Munich.

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