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Is There A Trade-Off Between Inflation Variability and Output-Gap Variability in The EMU Countries?

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  • Philip Arestis
  • Kostas Mouratidis

Abstract

This paper examines two issues. First, we compare, based on the ratio of output-gap variability to inflation variability, the monetary policy performance of eleven EMU countries for the whole period of the EMS. Second, 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 the whole period of the EMS and for two sub-periods (i.e., before and after the Maastricht Treaty). We find that for the whole period the trade-off ratio varies among EMU countries, especially in the case where industrial production is utilized to construct the output-gap variable. The results also vary from the point of view of how the trade-off variabilities change for each country before and after the Maastricht Treaty. The implication of these findings is that asymmetries exist in the euro area as a result of either different monetary policy preferences or different economic structures among the EMU's member countries.

Suggested Citation

  • Philip Arestis & Kostas Mouratidis, 2002. "Is There A Trade-Off Between Inflation Variability and Output-Gap Variability in The EMU Countries?," Economics Working Paper Archive wp_359, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_359
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    Cited by:

    1. Philip Arestis & Kostas Mouratidis, 2004. "Is There a Trade-Off Between Inflation Variability and Output-Gap Variability in the EMU Countries?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(5), pages 691-706, November.
    2. Marjan Petreski, 2010. "An Overhaul of a Doctrine: Has Inflation Targeting Opened a New Era in Developing-country Peggers?," FIW Working Paper series 057, FIW.
    3. Marjan Petreski, 2009. "A Critique On Inflation Targeting," Journal Articles, Center For Economic Analyses, pages 11-24, December.
    4. Philip Arestis & Andrew Brown & Kostas Mouratidis & Malcolm Sawyer, 2002. "The Euro: Reflections on the first three years," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 1-17.
    5. Sweidan, Osama D., 2011. "Inflation variability between central bank's preferences and the structure of the economy: A note," Economic Modelling, Elsevier, vol. 28(1-2), pages 630-636, January.
    6. Bulir, Ales & Hurnik, Jaromir, 2006. "The Maastricht inflation criterion: How unpleasant is purgatory?," Economic Systems, Elsevier, vol. 30(4), pages 385-404, December.
    7. Berument, Hakan & Yuksel, Ebru, 2007. "Effects of adopting inflation targeting regimes on inflation variability," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(1), pages 265-273.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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