Inflation Forecasts, Monetary Policy and Unemployment Dynamics: Evidence from the Us and the Euro Area

39 Pages Posted: 9 Feb 2007

See all articles by Matteo Ciccarelli

Matteo Ciccarelli

European Central Bank (ECB)

Carlo Altavilla

European Central Bank (ECB)

Date Written: February 2007

Abstract

This paper explores the role that inflation forecasts play in the uncertainty surrounding the estimated effects of alternative monetary rules on unemployment dynamics in the euro area and the US. We use the inflation forecasts of 8 competing models in a standard Bayesian VAR to analyse the size and the timing of these effects, as well as to quantify the uncertainty relative to the different inflation models under two rules. The results suggest that model uncertainty can be a serious issue and strengthen the case for a policy strategy that takes into account several sources of information. We find that combining inflation forecasts from many models not only yields more accurate forecasts than those of any specific model, but also reduces the uncertainty associated with the real effects of policy decisions. These results are in line with the model-combination approach that central banks already follow when conceiving their strategy.

Keywords: Inflation Forecasts, Unemployment, Model Uncertainty.

JEL Classification: C53, E24, E37.

Suggested Citation

Ciccarelli, Matteo and Altavilla, Carlo, Inflation Forecasts, Monetary Policy and Unemployment Dynamics: Evidence from the Us and the Euro Area (February 2007). ECB Working Paper No. 725, Available at SSRN: https://ssrn.com/abstract=959221

Matteo Ciccarelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carlo Altavilla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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