Macroeconomic Volatility Trade-off and Monetary Policy Regime in the Euro Area

Alvaro Aguiar () and Manuel Martins
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Alvaro Aguiar: CEMPRE, Faculdade de Economia da Universidade do Porto

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: 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.

Keywords: Monetary Policy Regime; Euro Area; Optimal Control; Dynamic Programming; GMM; FIML. (search for similar items in EconPapers)
JEL-codes: C32 C61 E52 E58 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2003-03
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:123

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