Inflation and Inflation Uncertainty in the Euro Area

Overall, these results give support to the view expressed by the President of the ECB,
Jean-Claude Trichet, a few years ago, when he argued that the single monetary policy
and its clear focus on long-run price stability had helped anchor medium- to long-run
inflation expectations in the Euro area, thus reducing inflation uncertainty (Trichet
2004). Short-run inflation uncertainty might have risen since 1999, but this does not
appear to reflect higher structural uncertainty associated with unanticipated monetary
policy changes, but possibly remaining differences across member states, fiscal
policy, and financial and commodity market price shocks.

This analysis can be extended in several directions. First, the regression model for the
inflation process can be expanded to include other possible determinants such as
industrial production, money growth, the yield curve, the exchange rate and credit.
Second, whether the observed patterns can indeed be attributed to the role played by
the ECB can be tested by comparing our findings with those obtained for a control
group of countries, such as other European countries outside the Eurozone, the US,
and Canada. Third, estimation of a time-varying VAR-GARCH model could be
carried out instead of treating unemployment and other possible variables as
exogenous. Fourth, the forecasting properties of the model could be investigated.

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