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The EURO and Inflation Uncertainty In The EMU

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Author Info
Guglielmo maria Coporale
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 the EMU countries have had rather different experiences, and that in the post-Euro period monetary policy might have become less effective in lowering inflation uncertainty, in the sense that a monetary tightening on the part of the ECB might in result in higher uncertainty. This suggests the need for improvements in the ECB’s analytical framework.

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Paper provided by Department of Economics, University of Glasgow in its series Working Papers with number 2005_13.

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Date of creation: Sep 2006
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Handle: RePEc:gla:glaewp:2005_13

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Web page: http://www.gla.ac.uk/departments/economics/

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models

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