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Inflation dynamics and international linkages: a model of the United States, the euro area and Japan

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Author Info
Günter Coenen () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Volker Wieland () (Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, 60311 Frankfurt am Main, Germany.)

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Abstract

In this paper we estimate a small macroeconometric model of the United States, the euro area and Japan with rational expectations and nominal rigidities due to staggered contracts. Comparing three popular contracting specifications we find that euro area and Japanese inflation dynamics are best explained by Taylor-style contracts, while Buiter-Jewitt/Fuhrer-Moore contracts perform somewhat better in fitting U.S. inflation dynamics. We are unable to fit Calvo-style contracts to inflation dynamics in any of the three economies without allowing either for ad-hoc persistence in unobservables or a significant backward-looking element. The completed model matches inflation and output dynamics in the United States, the euro area and Japan quite well. We then use it to evaluate the role of the exchange rate for monetary policy. Preliminary results, which are similar across the three economies, indicate little gain from a direct policy response to the exchange rate. JEL Classification: E31; E52; E58; E61.

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Paper provided by European Central Bank in its series Working Paper Series with number 181.

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Length: 49 pages
Date of creation: Sep 2002
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Handle: RePEc:ecb:ecbwps:20020181

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Related research
Keywords: Macroeconomic modelling; nominal rigidities; inflation persistence; international linkages; monetary policy rules.;

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References listed on IDEAS
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  6. Günter Coenen, 2000. "Asymptotic confidence bands for the estimated autocovariance and autocorrelation functions of vector autoregressive models," Working Paper Series 09, European Central Bank. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cornelia Holthausen & Jean-Charles Rochet, 2002. "Efficient pricing of large value interbank payment systems," Working Paper Series 184, European Central Bank. [Downloadable!]
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  2. Bas van Aarle & Harry Garretsen & Florence Huart, 2003. "Transatlantic Monetary and Fiscal Policy Interaction," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Tarkka , Juha & Kortelainen , Mika, 2005. "International economic spillovers and the liquidity trap," Research Discussion Papers 18/2005, Bank of Finland. [Downloadable!]
  4. Volker Wieland (Goethe University Frankfurt) & Günter Coenen (European Central Bank), 2004. "Exchange Rate Policy and the Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 65, Society for Computational Economics. [Downloadable!]
    Other versions:
  5. Andrew Hughes Hallett, 2005. "Political Devolution without Fiscal Devolution," Working Papers 0505, Department of Economics, Vanderbilt University. [Downloadable!]
  6. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics. [Downloadable!]
  7. Nicoletta Batini, 2002. "Euro area inflation persistence," Working Paper Series 201, European Central Bank. [Downloadable!]
    Other versions:
  8. Matt Klaeffling & Victor Lopez Perez, 2003. "Inflation targets and the liquidity trap," Working Paper Series 272, European Central Bank. [Downloadable!]
  9. Guenter Coenen & Volker Wieland, 2003. "The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan," CFS Working Paper Series 2003/09, Center for Financial Studies. [Downloadable!]
  10. Eilev S. Jansen, 2004. "Modelling inflation in the Euro Area," Working Paper 2004/10, Norges Bank. [Downloadable!]
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  11. George Hondroyiannis & Sophia Lazaretou, 2007. "Inflation persistence during periods of structural change: an assessment using Greek data," Empirica, Springer, vol. 34(5), pages 453-475, December. [Downloadable!] (restricted)
    Other versions:
  12. Günter Coenen & Volker Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest," CFS Working Paper Series 2004/14, Center for Financial Studies. [Downloadable!]
  13. Coenen, Günter & Wieland, Volker, 2003. "The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan," CEPR Discussion Papers 3895, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Moons C. & Garretsen H. & Van Aarle B. & Fornero J., 2007. "Monetary policy in the New-Keynesian model: An application to the Euro-Area," Working Papers 2007014, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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  15. Lutz Kilian & Atsushi Inoue, 2003. "On the selection of forecasting models," Working Paper Series 214, European Central Bank. [Downloadable!]
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