Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/30621 
Year of Publication: 
2009
Series/Report no.: 
CESifo Working Paper No. 2720
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
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.
Subjects: 
inflation
inflation uncertainty
time-varying parameters
GARCH models
ECB, EMU
JEL: 
E31
E52
C22
Document Type: 
Working Paper
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