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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 DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 909.

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Length: 20 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diwwpp:dp909

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

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References

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Citations

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Cited by:
  1. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," CESifo Working Paper Series 2759, CESifo Group Munich.
  2. Koop, Gary & Onorante, Luca, 2011. "Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters," SIRE Discussion Papers 2011-19, Scottish Institute for Research in Economics (SIRE).
  3. Di Bartolomeo Giovanni & Giuli Francesco, 2009. "Fiscal and monetary interaction under monetary policy uncertainty," wp.comunite 0061, Department of Communication, University of Teramo.
  4. 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.
  5. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
  6. Sauter, Oliver, 2012. "Assessing uncertainty in Europe and the US: is there a common uncertainty factor?," MPRA Paper 38031, University Library of Munich, Germany.

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