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Central Bank Independence, Exchange Rate Policy and Inflation Persistence Empirical Evidence on Selected EMU Countries

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  • Athanasios Papadopoulos

    ()
    (Department of Economics, University of Crete, Greece)

  • Mo�se Sidiropoulos

    ()
    (Universit� Louis Pasteur, FRANCE)

Abstract

The purpose of this paper is to provide theoretical arguments and explore for empirical evidence for the rationale that low inflation persistence may be achieved either by setting up an independent Central Bank or by an exchange-rate based policy. Our theoretical analysis states that the degree of Central Bank independence and exchange rate policy changes affect the inflation persistence. In addition, our empirical analysis, which concerns with selected EMU countries (France, Germany, Greece, Italy and Spain for the period 1980-1998) validates the argument. In this exercise the most likely date for the change in regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0107.

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Length: 16 pages
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Handle: RePEc:crt:wpaper:0107

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Keywords: Exchange rate policy; Central Bank independence; inflation persistence; EMU;

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  1. Pierre-Richard Agénor & Mark P. Taylor, 1992. "Testing for Credibility Effects," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 545-571, September.
  2. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  3. Burdekin, R.C.K. & Siklos, P.L., 1997. "Exchange Rate Regimes and Shfts in Inflation Persistence: Does Nothing Else Matter?," Working Papers 97-2, Wilfrid Laurier University, Department of Economics.
  4. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  5. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  6. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
  7. Vogelsang, T.I. & Perron, P., 1991. "Nonstationary and Level Shifts With An Application To Purchasing Power Parity," Papers 359, Princeton, Department of Economics - Econometric Research Program.
  8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  9. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  10. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
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