Inflation and Inflation Uncertainty in the Euro Area

27 Pages Posted: 24 Jul 2010

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luca Onorante

Joint Research Centre, Italy

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions

Date Written: July 16, 2010

Abstract

This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages 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. Steadystate 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, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.

Keywords: Inflation, Inflation Uncertainty, Time-Varying Parameters, GARCH Models, ECB, EMU

JEL Classification: E31, E52, C22

Suggested Citation

Caporale, Guglielmo Maria and Onorante, Luca and Paesani, Paolo, Inflation and Inflation Uncertainty in the Euro Area (July 16, 2010). ECB Working Paper No. 1229, Available at SSRN: https://ssrn.com/abstract=1641168 or http://dx.doi.org/10.2139/ssrn.1641168

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
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United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

German Institute for Economic Research (DIW Berlin) ( email )

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Luca Onorante

Joint Research Centre, Italy

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I-21020 Ispra (VA)
United States

Paolo Paesani

University of Rome - Tor Vergata - Department of Economics and Institutions ( email )

Via Columbia n. 2
00133 Rome
Italy

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