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Central Bank Independence, Exchange Rate Policy and Inflation Persistence Empirical Evidence on Selected EMU Countries

  • Athanasios Papadopoulos

    ()

    (Department of Economics, University of Crete, Greece)

  • Mo�se Sidiropoulos

    ()

    (Universit� Louis Pasteur, FRANCE)

The purpose of this paper is to provide theoretical arguments and explore for empirical evidence for the rationale that low inflation persistence may be achieved either by setting up an independent Central Bank or by an exchange-rate based policy. Our theoretical analysis states that the degree of Central Bank independence and exchange rate policy changes affect the inflation persistence. In addition, our empirical analysis, which concerns with selected EMU countries (France, Germany, Greece, Italy and Spain for the period 1980-1998) validates the argument. In this exercise the most likely date for the change in regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0107.

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Length: 16 pages
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Handle: RePEc:crt:wpaper:0107
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  1. repec:nbr:nberre:0126 is not listed on IDEAS
  2. Burdekin, R.C.K. & Siklos, P.L., 1997. "Exchange Rate Regimes and Shfts in Inflation Persistence: Does Nothing Else Matter?," Working Papers 97-2, Wilfrid Laurier University, Department of Economics.
  3. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  4. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, vol. 81(5), pages 1254-75, December.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  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. Perron, P., 1990. "Further Evidence On Breaking Trend Functions In Macroeconomics Variables," Papers 350, Princeton, Department of Economics - Econometric Research Program.
  8. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  9. Pierre-Richard Agénor & Mark P. Taylor, 1992. "Testing for Credibility Effects," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 545-571, September.
  10. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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