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The EURO and Inflation Uncertainty In The EMU

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  • Guglielmo maria Coporale
  • Alexandros Kontonikas

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.

Suggested Citation

  • Guglielmo maria Coporale & Alexandros Kontonikas, 2006. "The EURO and Inflation Uncertainty In The EMU," Working Papers 2005_13, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2005_13
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    More about this item

    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; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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