Inflation and Inflation Uncertainty in the Euro Area
Guglielmo Maria Caporale
London South Bank University; Brunel University - Brunel Business School; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
European Central Bank (ECB); European University Institute
University of Rome - Tor Vergata - Department of Economics and Institutions
July 1, 2009
DIW Berlin Discussion Paper No. 909
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.
Number of Pages in PDF File: 23
Keywords: Inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB, EMU
JEL Classification: E31, E52, C22working papers series
Date posted: October 23, 2009
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