Macroeconomic uncertainty and performance in the European Union and implications for the objectives of monetary policy

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Title: Macroeconomic uncertainty and performance in the European Union and implications for the objectives of monetary policy
Authors: Bredin, Donal
Fountas, Stilianos
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Date: 2005
Abstract: We use a very general bivariate GARCH-M model and EU monthly data covering the 1962-2003 period to test for the impact of real (output growth) and nominal (inflation) macroeconomic uncertainty on inflation and output growth. Our evidence supports a number of important conclusions. First, in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in most countries is negative. Second, contrary to expectations,inflation uncertainty in most cases improves the output growth performance of an economy. Third, inflation and output uncertainty have a mixed effect on inflation. These results imply that macroeconomic uncertainty may even improve macroeconomic performance. The first two results also imply that the ECB should focus its monetary policy strategy on stabilising output growth rather than inflation.
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Copyright (published version): 2005, Centre for Financial Markets
Keywords: InflationOutput growthMacroeconomic uncertaintyMonetary policyGARCH models
Subject LCSH: Inflation (Finance)--Econometric models
Economic development--Econometric models
Monetary policy--European Union countries
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Centre for Financial Markets Working Papers

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