Is There a Trade-Off between Inflation Variability and Output-Gap Variability in the Emu Countries?

The Levy Economics Institute of Bard College Working Paper No. 359

19 Pages Posted: 18 Mar 2003

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Konstantinos Mouratidis

National Institute of Economic and Social Research (NIESR)

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Abstract

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.

Keywords: EMU, inflation-targeting, output-gap variability

JEL Classification: E31

Suggested Citation

Arestis, Philip and Mouratidis, Konstantinos, Is There a Trade-Off between Inflation Variability and Output-Gap Variability in the Emu Countries?. The Levy Economics Institute of Bard College Working Paper No. 359. Available at SSRN: https://ssrn.com/abstract=371080 or http://dx.doi.org/10.2139/ssrn.371080

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Konstantinos Mouratidis

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

HOME PAGE: http://www.niesr.ac.uk/STAFFBIO/KMourati.htm

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