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Inflation Persistence under Semi-Fixed Exchange Rate Regimes: The European Evidence 1974–1998

  • Clemens Kool

    ()

  • Alex Lammertsma

In this paper, we empirically investigate the link between exchange rate accommodation and inflation persistence in Europe. We introduce the lagged level of the real exchange rate as an appropriate indicator of exchange rate accommodation. We correspondingly estimate a non-linear autoregressive inflation equation for ten European countries (excluding Germany) for the period 1974:1–1998:2. In the estimation procedure we allow for the presence of an unknown number of shifts in the mean of inflation. Overall, our results provide modest support for the existence of the theoretically hypothesized link between exchange rate accommodation and inflation persistence. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11079-005-5332-1
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 16 (2005)
Issue (Month): 1 (January)
Pages: 51-76

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Handle: RePEc:kap:openec:v:16:y:2005:i:1:p:51-76
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  1. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  2. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  3. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  4. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  5. Koedijk, Kees G. & Kool, Clemens J. M., 1992. "Dominant interest and inflation differentials within the EMS," European Economic Review, Elsevier, vol. 36(4), pages 925-943, May.
  6. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
  7. Michael Artis & Dilip Nachane, 1990. "Wages and prices in Europe: A test of the German leadership thesis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 126(1), pages 59-77, March.
  8. Alex Lammertsma & Clemens J. M. Kool, 2000. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 312-315, March.
  9. Bean, Charles R, 1987. "Sterling Misalignment and British Trade Performance," CEPR Discussion Papers 177, C.E.P.R. Discussion Papers.
  10. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
  11. Banerjee, A. & Cockerell, L. & Russell, B., 1998. "An I(2) Analysis of Inflation and the Markup," Economics Series Working Papers 99203, University of Oxford, Department of Economics.
  12. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  13. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-65, February.
  14. Herz, Bernhard & Roger, Werner, 1992. "The EMS is a greater Deutschmark area," European Economic Review, Elsevier, vol. 36(7), pages 1413-1425, October.
  15. Burdekin, Richard C K & Siklos, Pierre L, 1999. "Exchange Rate Regimes and Shifts in Inflation Persistence: Does Nothing Else Matter?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 235-47, May.
  16. Alogoskoufis, George S, 1992. "Monetary Accommodation, Exchange Rate Regimes and Inflation Persistence," Economic Journal, Royal Economic Society, vol. 102(412), pages 461-80, May.
  17. Lothian, James R., 1997. "Multi-country evidence on the behavior of purchasing power parity under the current float," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 19-35, February.
  18. Michele Fratianni & Juergen Hagen, 1992. "German dominance in the EMS:The empirical evidence," Open Economies Review, Springer, vol. 3(1), pages 127-128, February.
  19. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
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  25. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  26. Paul Grauwe, 1990. "The cost of disinflation and the European Monetary System," Open Economies Review, Springer, vol. 1(2), pages 147-173, June.
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