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Macroeconomic uncertainty and performance in the European Union and implications for the objectives of monetary policy

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  • Donal Bredin
  • Stilianos Fountas

Abstract

We use a very general bivariate GARCH-M model and EU monthly data covering the 1962-2003 period to test for the impact of real (output growth) and nominal (inflation) macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in most countries is negative. Second, contrary to expectations,inflation uncertainty in most cases improves the output growth performance of an economy. Third, inflation and output uncertainty have a mixed effect on inflation. These results imply that macroeconomic uncertainty may even improve macroeconomic performance. The first two results also imply that the ECB should focus its monetary policy strategy on stabilising output growth rather than inflation.

Suggested Citation

  • Donal Bredin & Stilianos Fountas, 2005. "Macroeconomic uncertainty and performance in the European Union and implications for the objectives of monetary policy," Centre for Financial Markets Working Papers 10197/1184, Research Repository, University College Dublin.
    • Handle: RePEc:rru:cfmwps:10197/1184
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    File URL: http://hdl.handle.net/10197/1184
    File Function: First version, 2005
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