Macroeconomic Volatility Trade-off and Monetary Policy Regime in the Euro Area (FEP Working Paper Nº 123, Faculdade de Economia da Universidade do Porto o, Março 2003)

• Type: Academic Work
• Date: 2003

Authors

Álvaro Aguiar (Author) FEP; Manuel Mota Freitas Martins (Author) FEP

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics

Other information

Abstract (EN): This research uncovers a well-defined monetary policy regime starting in 1986 in the aggregate Euro Area. Both alternative solution-estimation methods employed - optimal control cum GMM, and dynamic programming cum FIML - identify a regime of strict inflation targeting with interest rate smoothing. The unemployment gap, properly estimated as quasi real-time information, is a relevant element in the information set of the monetary authority, despite not being included in its preferences. The emergence of the regime relates to the improvement of the volatility trade-off between inflation and unemployment gap since the mid-80s. Additional improving factors have been milder supply shocks and better ability of policymakers to set the interest rate closer to optimum.

Language: English

Type (Professor's evaluation): Scientific