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Credibility of European Monetary System Interest Rate Policies: A Markov Regime-Switching Approach

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  • Philip Arestis
  • Kostas Mouratidis

Abstract

The Markov regime-switching modelling framework, with time-varying transition probabilities, is utilized to study the credibility of monetary policy in five member countries of the European Monetary System during the period 1979-98 (Austria, Belgium, France, Italy and the Netherlands). The output-gap variability and the inflation variability variables are incorporated in the determination of the monetary policy preferences of the five countries. Empirical evidence is provided to show that although all the countries in our sample followed a credible monetary policy regarding price stability, they had different preferences regarding the trade-off between the stabilization of output-gap variability and inflation variability. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2004.

Suggested Citation

  • Philip Arestis & Kostas Mouratidis, 2004. "Credibility of European Monetary System Interest Rate Policies: A Markov Regime-Switching Approach," Manchester School, University of Manchester, vol. 72(1), pages 1-23, January.
  • Handle: RePEc:bla:manchs:v:72:y:2004:i:1:p:1-23
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    Cited by:

    1. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.

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