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The Euro And Inflation Uncertainty In The European Monetary Union

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Author Info
Guglielmo Maria Caporale ()
Alexandros Kontonikas

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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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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
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Handle: RePEc:bru:bruedp:06-01

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

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