Macroeconomic Volatility Trade-off and Monetary Policy Regime in the Euro Area
This research uncovers a well-defined monetary policy regime starting in 1986 in the aggregate Euro Area. Both alternative solution-estimation methods employed - optimal control cum GMM, and dynamic programming cum FIML - identify a regime of strict inflation targeting with interest rate smoothing. The unemployment gap, properly estimated as quasi real-time information, is a relevant element in the information set of the monetary authority, despite not being included in its preferences. The emergence of the regime relates to the improvement of the volatility trade-off between inflation and unemployment gap since the mid-80s. Additional improving factors have been milder supply shocks and better ability of policymakers to set the interest rate closer to optimum.
|Date of creation:||Mar 2003|
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- Mojon, Benoît & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank. Full references (including those not matched with items on IDEAS)
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