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Is 2 % the optimal inflation rate for the Euro Area?

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  • Ma Caraballo

    ()

  • Tilemahos Efthimiadis

Abstract

According to the relevant literature, monetary policy implications concerning the optimal inflation rate can be derived by examining the relationship between inflation and the Relative Price Variability (RPV). This paper studies this issue for selected Euro Area (EA) countries, using monthly data for the Harmonized Index of Consumer Prices. In particular, semi-parametric estimations are employed so as to find the accurate form of the inflation-RPV relationship. The results indicate that this relationship exhibits a U-shape functional profile. Furthermore, the optimal inflation rates for the EA, France, Germany and Spain are also calculated. For all countries and the EA, we find that although the European Central Bank’s “below but close to 2 %” inflation target is optimal for the EA average, it is not the optimum inflation rate for the individual counties. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s10368-012-0212-9
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Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 9 (2012)
Issue (Month): 3 (September)
Pages: 235-243

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Handle: RePEc:kap:iecepo:v:9:y:2012:i:3:p:235-243
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=111059

Keywords: Monetary policy; Relative price variability; Inflation; ECB; E31; C23;

Find related papers by JEL classification:

  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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  1. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  2. Hercowitz, Zvi, 1981. "Money and the Dispersion of Relative Prices," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 328-56, April.
  3. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  4. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  5. Alexander Bick & Dieter Nautz, 2008. "Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 61-76, September.
  6. 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., vol. 45(132), pages 235-255.
  7. Chi-Young Choi, 2010. "Reconsidering the Relationship between Inflation and Relative Price Variability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 769-798, 08.
  8. Caplin, A. & Leahy, J., 1989. "State-Dependent Pricing And The Dynamics Of Money And Output," Discussion Papers 1989_32, Columbia University, Department of Economics.
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