BESS at MNB May 19, 2010: Guglielmo-Maria Caporale „ Inflation and Inflation Uncertainty in the Euro Area” (joint with Luca Onorante and Paolo Paesani)

Speaker:Guglielmo Maria Caporale (Brunel University, London)

Venue: MNB-Visitor Centre

Time: 15:15 pm, Wednesday, May 19, 2010

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.

JEL Classification: E31, E52, C22

Keywords: Inflation, Inflation Uncertainty, Time-Varying Parameters, GARCH Models, ECB, EMU

You can download paper here

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