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Inflation and inflation uncertainty in the euro area

  • Guglielmo Caporale

    ()

  • Luca Onorante

    ()

  • Paolo Paesani

    ()

This article estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has stabilised. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s00181-011-0489-5
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 43 (2012)
Issue (Month): 2 (October)
Pages: 597-615

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Handle: RePEc:spr:empeco:v:43:y:2012:i:2:p:597-615
DOI: 10.1007/s00181-011-0489-5
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/econometrics/journal/181/PS2

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