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Is There a Trade-Off Between Inflation Variability and Output-Gap Variability in the EMU Countries?

  • Philip Arestis
  • Kostas Mouratidis

This paper examines the performance of monetary policy in eleven EMU countries for the whole period of the EMS. This is based on the trade-off between inflation variability and output-gap variability. To this end, we examine whether the introduction of an implicit inflation targeting by the EMU member countries after the Maastricht Treaty, changed the trade-off between inflation variability and output-gap variability. We employ a stochastic volatility model for two sub-periods of the EMS (i.e. before and after the Maastricht Treaty). We find that the trade-off varies amongst EMU countries. The implication of these findings is that there are asymmetries in the euro area, due to different economic structures among the member countries of the EMU. Copyright (c) Scottish Economic Society 2004.

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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 51 (2004)
Issue (Month): 5 (November)
Pages: 691-706

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Handle: RePEc:bla:scotjp:v:51:y:2004:i:5:p:691-706
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  1. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 1998. "Tradeoffs Between Inflation and Output-Gap Variances in an Optimizing-Agent Model," Seminar Papers 650, Stockholm University, Institute for International Economic Studies.
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