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The role of inflation expectations in the EMU

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  • Maritta Paloviita
  • Matti Viren

Abstract

This article analyses the role of inflation expectations in the euro area. On the one hand, the question is how inflation expectations affect both inflation and output, and, on the other hand, how inflation expectations reflect developments in these variables. The analysis makes use of a simple VAR model of inflation, inflation expectations and output, which allows for scrutinizing the dynamic interrelationships between these variables. Empirical results strongly suggest that inflation expectations are the key ingredient of the inflationary process for the euro area and they have a significant negative effect on output. Inflation expectations are found to be relatively persistent - almost as persistent as output - albeit they do adapt to developments in both output and (actual) inflation, especially in the medium term.

Suggested Citation

  • Maritta Paloviita & Matti Viren, 2009. "The role of inflation expectations in the EMU," Applied Economics Letters, Taylor & Francis Journals, vol. 16(16), pages 1671-1675.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:16:p:1671-1675
    DOI: 10.1080/13504850701591309
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    References listed on IDEAS

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    1. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    2. Padula, Mario & Backé, Peter, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series 222, European Central Bank.
    3. Maritta Paloviita & Matti Virén, 2005. "The role of expectations in the inflation process in the euro area," Macroeconomics 0508031, University Library of Munich, Germany.
    4. Levin, Andrew T. & Piger, Jeremy M. & Natalucci, Fabio M., 2004. "Explicit inflation objectives and macroeconomic outcomes," Working Paper Series 383, European Central Bank.
    5. repec:zbw:bofrdp:2005_006 is not listed on IDEAS
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    1. repec:zbw:bofrdp:2007_014 is not listed on IDEAS
    2. Paloviita, Maritta, 2007. "Estimating a small DSGE model under rational and measured expectations : some comparisons," Research Discussion Papers 14/2007, Bank of Finland.

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