Credibility of EMS Interest Rate Policies: A Markov Regine-Switching Approach

Levy Economics Institute Working Paper No. 361

31 Pages Posted: 25 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)

Date Written: November 2002

Abstract

The primary objective of this paper is to use the Markov regime-switching modeling framework to study the credibility of monetary policy in five member countries of the European Monetary System (EMS) during the period 1979 to 1998. The five countries examined for this purpose are Austria, Belgium, France, Italy, and the Netherlands. The major innovation of this paper is the use of a Markov regime-switching model with time-varying transition probabilities. The output-gap variability and the inflation variability variables are incorporated into the determination of the monetary policy preferences of individual member countries of the EMS. Empirical evidence is provided to show that although all the countries in our sample followed a credible monetary policy regarding price stability, they had different preferences regarding the trade-off between the stabilization of output-gap variability and inflation variability.

Keywords: Credibility, EMS, Markov Regime-Switching Models

JEL Classification: C32, E52

Suggested Citation

Arestis, Philip and Mouratidis, Konstantinos, Credibility of EMS Interest Rate Policies: A Markov Regine-Switching Approach (November 2002). Levy Economics Institute Working Paper No. 361. Available at SSRN: https://ssrn.com/abstract=371100 or http://dx.doi.org/10.2139/ssrn.371100

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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