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The Euro And Inflation Uncertainty In The European Monetary Union

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  • Guglielmo Maria Caporale

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  • Alexandros Kontonikas

Abstract

In this paper, we investigate empirically the relationship between inflation and inflation uncertainty in twelve EMU countries. We estimate a time-varying parameter model with a GARCH specification for the conditional volatility of inflation in order to distinguish between short-run (structural and impulse) and steady-state uncertainty. We then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the Euro, and its effects on the links between inflation and inflation uncertainty. We find that steady-state inflation has generally remained stable (with the important exception of Germany, where the trend has become positive), steady-state inflation uncertainty and inflation persistence have both increased, and the relationship between inflation and inflation uncertainty has broken down in many countries. These findings cast doubt on the optimistic view taken by the ECB concerning its success in controlling inflation, and suggest the need for improvements in its analytical framework.

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Bibliographic Info

Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 06-01.

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Length: 30 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:bru:bruedp:06-01

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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Citations

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Cited by:
  1. Guglielmo Caporale & Luca Onorante & Paolo Paesani, 2012. "Inflation and inflation uncertainty in the euro area," Empirical Economics, Springer, vol. 43(2), pages 597-615, October.
  2. Agenor, Pierre-Richard & Aizenman, Joshua, 2008. "Capital Market Imperfections and the Theory of Optimum Currency Areas," Santa Cruz Department of Economics, Working Paper Series qt7668j94x, Department of Economics, UC Santa Cruz.
  3. Kyriakos C. Neanidis & Christos S. Savva, 2010. "Nominal Uncertainty and Inflation: The Role of European Union Membership," Centre for Growth and Business Cycle Research Discussion Paper Series 146, Economics, The Univeristy of Manchester.
  4. Vito Polito & Peter Spencer, . "UK Macroeconomic Volatility and the Welfare Costs of Inflation," Discussion Papers 11/21, Department of Economics, University of York.
  5. Sauter, Oliver, 2012. "Assessing uncertainty in Europe and the US: is there a common uncertainty factor?," MPRA Paper 38031, University Library of Munich, Germany.
  6. Steffen Ahrens & Matthias Hartmann, 2014. "State-dependence vs. Time-dependence: An Empirical Multi-Country Investigation of Price Sluggishness," Kiel Working Papers 1907, Kiel Institute for the World Economy.
  7. Khan, Muhammad & Kebewar, mazen & Nenovsky, Nikolay, 2013. "Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe," MPRA Paper 45523, University Library of Munich, Germany.
  8. Thomas Windberger & Achim Zeileis, 2011. "Structural Breaks in Inflation Dynamics within the European Monetary Union," Working Papers 2011-12, Faculty of Economics and Statistics, University of Innsbruck.
  9. Hartmann, Matthias & Roestel, Jan, 2013. "Inflation, output and uncertainty in the era of inflation targeting – A multi-economy view on causal linkages," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 98-112.
  10. Don Bredin & Stilianos Fountas, 2011. "US Inflation and inflation uncertainty in a historical perspective: The impact of recessions," Discussion Paper Series 2011_13, Department of Economics, University of Macedonia, revised Sep 2011.
  11. Christian Grimme & Steffen Henzel & Elisabeth Wieland, 2011. "Inflation uncertainty revisited: A proposal for robust measurement," Ifo Working Paper Series Ifo Working Paper No. 111, Ifo Institute for Economic Research at the University of Munich.

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