CESifo Working Paper No. 2720
Inflation and Inflation Uncertainty
in the Euro Area
Abstract
This paper estimates a time-varying AR-GARCH model of inflation producing measures of
inflation uncertainty for the euro area, and investigates the linkages between them in a VAR
framework, also allowing for the possible impact of the policy regime change associated with
the start of EMU in 1999. The main findings are as follows. Steady-state inflation and
inflation uncertainty have declined steadily since the inception of EMU, whilst short-run
uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure
provides further evidence of a structural break coinciding with the introduction of the euro
and resulting in lower long-run uncertainty. It also appears that the direction of causality has
been reversed, and that in the euro period the Friedman-Ball link is empirically supported,
implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.
JEL Code: E31, E52, C22.
Keywords: inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB,
EMU.
Guglielmo Maria Caporale
Centre for Empirical Finance
Brunel University, London
West London, UB8 3PH
United Kingdom
Luca Onorante
Fiscal Policies Division
European Central Bank
Postfach 16 03 19
60066 Frankfurt am Main
Germany
[email protected]
Paolo Paesani
University of Rome ‘Tor Vergata’
Faculty of Economics
Via Columbia, 2
00133 Rome
Italy
July 2009
More intriguing information
1. Family, social security and social insurance: General remarks and the present discussion in Germany as a case study2. The name is absent
3. Confusion and Reinforcement Learning in Experimental Public Goods Games
4. The name is absent
5. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules
6. New Evidence on the Puzzles. Results from Agnostic Identification on Monetary Policy and Exchange Rates.
7. EXECUTIVE SUMMARIES
8. Structure and objectives of Austria's foreign direct investment in the four adjacent Central and Eastern European countries Hungary, the Czech Republic, Slovenia and Slovakia
9. Restructuring of industrial economies in countries in transition: Experience of Ukraine
10. Palvelujen vienti ja kansainvälistyminen