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Inflation and Inflation Uncertainty in the Euro Area

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  • Guglielmo Maria Caporale
  • Luca Onorante
  • Paolo Paesani

Abstract

This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates the linkages between them in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2720.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2720

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Keywords: inflation; inflation uncertainty; time-varying parameters; GARCH models; ECB; EMU;

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Cited by:
  1. 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.
  2. Steffen Henzel & Elisabeth Wieland, 2013. "Synchronization and Changes in International Inflation Uncertainty," CESifo Working Paper Series 4194, CESifo Group Munich.
  3. Sauter, Oliver, 2012. "Assessing uncertainty in Europe and the US: is there a common uncertainty factor?," MPRA Paper 38031, University Library of Munich, Germany.
  4. Di Bartolomeo Giovanni & Giuli Francesco, 2009. "Fiscal and monetary interaction under monetary policy uncertainty," wp.comunite 0061, Department of Communication, University of Teramo.
  5. Koop, Gary & Onorante, Luca, 2012. "Estimating Phillips curves in turbulent times using the ECB's survey of professional forecasters," Working Paper Series 1422, European Central Bank.
  6. Michael Funke & Yu-Fu Chen, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Quantitative Macroeconomics Working Papers 20908, Hamburg University, Department of Economics.
  7. Bossone, Biagio, 2014. "Liquidity and capital under uncertainty and changing market sentiment: A simple analysis," Review of Financial Economics, Elsevier, vol. 23(2), pages 98-105.

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