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Inflation Forecasts, Monetary Policy and Unemployment Dynamics: Evidence from the US and the Euro Area

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  • Carlo Altavilla
  • Matteo Ciccarelli

Abstract

This paper explores the role that inflation forecasts play in the uncertainty surrounding the estimated effects of alternative monetary rules on unemployment dynamics in the euro area and the US. We use the inflation forecasts of 8 competing models in a standard Bayesian VAR to analyse the size and the timing of these effects, as well as to quantify the uncertainty relative to the different inflation models under two rules. The results suggest that model uncertainty can be a serious issue and strengthen the case for a policy strategy that takes into account several sources of information. We find that combining inflation forecasts from many models not only yields more accurate forecasts than those of any specific model, but also reduces the uncertainty associated with the real effects of policy decisions. These results are in line with the model-combination approach that central banks already follow when conceiving their strategy.

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Bibliographic Info

Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 7_2006.

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Date of creation: 01 Apr 2006
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Handle: RePEc:prt:dpaper:7_2006

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Keywords: Inflation Forecasts; Unemployment; Model Uncertainty;

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References

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  1. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 387-422, January.
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Citations

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Cited by:
  1. Philip Vermeulen & Daniel Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2007. "Price setting in the euro area : some stylised facts from individual producer price data," Working Paper Research, National Bank of Belgium 111, National Bank of Belgium.
  2. Pang, Iris Ai Jao, 2010. "Forecasting Hong Kong economy using factor augmented vector autoregression," MPRA Paper 32495, University Library of Munich, Germany.
  3. Carlo Altavilla & Matteo Ciccarelli, 2009. "The Effects of Monetary Policy on Unemployment Dynamics Under Model Uncertainty. Evidence from the US and the Euro Area," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 231, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Mehmet Balcilar & Rangan Gupta & Anandamayee Majumdar & Stephen M. Miller, 2012. "Was the Recent Downturn in US GDP Predictable?," Working Papers 201230, University of Pretoria, Department of Economics.
  5. Jean Louis, Rosmy & Balli, Faruk, 2013. "Low-inflation-targeting monetary policy and differential unemployment rate: Is monetary policy to be blamed for the financial crisis? — Evidence from major OECD countries," Economic Modelling, Elsevier, Elsevier, vol. 30(C), pages 546-564.
  6. Altavilla, Carlo & Ciccarelli, Matteo, 2007. "Information combination and forecast (st)ability evidence from vintages of time-series data," Working Paper Series, European Central Bank 0846, European Central Bank.
  7. María Ángeles Caraballo & Carlos Dabús., 2008. "The Determinants of Relative Price Variability: Further Evidence from Argentina," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 235-255.
  8. Gregoriou, Andros & Kontonikas, Alexandros, 2009. "Modeling the behaviour of inflation deviations from the target," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 90-95, January.

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