Macroeconomic Uncertainty and Performance in the European Union and Implications for the objectives of Monetary Policy
AbstractWe use a very general bivariate GARCH-M model and monthly data on EU countries covering the 1962-2003 period to test for the impact of real (output growth) and nominal (inflation) macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in several countries is negative. Second, contrary to expectations, inflation uncertainty in several cases improves the output growth performance of an economy implying that the focus of European monetary policy strategy on stabilising inflation rather than output growth may be misplaced. Third, inflation and output uncertainty have a mixed effect on inflation. Our conclusions are based on adopting both a structural and a reduced form bivariate GARCH model. These results imply that macroeconomic uncertainty may even improve macroeconomic performance. Finally, we also and statistically significant evidence of regime switching for both inflation and output growth volatility throughout the sample.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_01.
Date of creation: Jan 2008
Date of revision: Jan 2008
Contact details of provider:
Web page: http://www.uom.gr/index.php?tmima=3
Inflation; Output growth; Macroeconomic uncertanty;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-MON-2008-02-09 (Monetary Economics)
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.:
- Victor Zarnowitz & Geoffrey H. Moore, 1986. "Major Changes in Cyclical Behavior," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 519-582 National Bureau of Economic Research, Inc.
- Woodford, Michael, 1990. "Learning to Believe in Sunspots," Econometrica, Econometric Society, vol. 58(2), pages 277-307, March.
- Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
- Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
- Pindyck, Robert, 1989.
"Irreversibility, uncertainty, and investment,"
Policy Research Working Paper Series
294, The World Bank.
- Robert S. Pindyck, 1991. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
- Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- K Blackburn & A Pelloni, 2002.
"Growth, Cycles and Stabilisation Policy,"
The School of Economics Discussion Paper Series
0216, Economics, The University of Manchester.
- K Blackburn & A Pelloni, 2002. "Growth, Cycles and Stabilisation Policy," Centre for Growth and Business Cycle Research Discussion Paper Series 12, Economics, The Univeristy of Manchester.
- Garey Ramey & Valerie A. Ramey, 1991. "Technology Commitment and the Cost of Economic Fluctuations," NBER Working Papers 3755, National Bureau of Economic Research, Inc.
- Stilianos Fountas & Menelaos Karanasos & Alfonso Mendoza, 2004. "Output Variability and Economic Growth: the Japanese Case," Bulletin of Economic Research, Wiley Blackwell, vol. 56(4), pages 353-363, October.
- Ben S. Bernanke, 1980.
"Irreversibility, Uncertainty, and Cyclical Investment,"
NBER Working Papers
0502, National Bureau of Economic Research, Inc.
- Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 85-106, February.
- Blackburn, Keith, 1999. "Can Stabilisation Policy Reduce Long-Run Growth?," Economic Journal, Royal Economic Society, vol. 109(452), pages 67-77, January.
- Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
- Blackburn, Keith & Pelloni, Alessandra, 2004. "On the relationship between growth and volatility," Economics Letters, Elsevier, vol. 83(1), pages 123-127, April.
- Caporale, Tony & McKiernan, Barbara, 1996. "The Relationship between Output Variability and Growth: Evidence from Post War UK Data," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(2), pages 229-36, May.
- Oscar Jorda & Kevin Salyer, .
"The Response of Term Rates to Monetary Policy Uncertainty,"
Department of Economics
01-06, California Davis - Department of Economics.
- Oscar Jorda & Kevin Salyer, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 941-962, October.
- Kevin Salyer & Oscar Jorda, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Working Papers 16, University of California, Davis, Department of Economics.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Elder, John, 2003. "An impulse-response function for a vector autoregression with multivariate GARCH-in-mean," Economics Letters, Elsevier, vol. 79(1), pages 21-26, April.
- Garey Ramey & Valerie A. Ramey, 1994.
"Cross-Country Evidence on the Link Between Volatility and Growth,"
NBER Working Papers
4959, National Bureau of Economic Research, Inc.
- Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Theodore Panagiotidis).
If references are entirely missing, you can add them using this form.