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

  • Philip Arestis

    (Levy Economics Institute of Bard College and National Institute of Economic and Social Research)

  • Kostas Mouratidis

    (Levy Economics Institute of Bard College and National Institute of Economic and Social Research)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 0301005.

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Date of creation: 17 Jan 2003
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Handle: RePEc:wpa:wuwpma:0301005
Note: Type of Document - word; prepared on PC; to print on HP; figures: included
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