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

Donal Bredin and Stilianos Fountas

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

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.

Keywords: Inflation; Output growth; Macroeconomic uncertainty; Monetary policy; GARCH models; Inflation (Finance)--Econometric models; Economic development--Econometric models; Macroeconomics; Monetary policy--European Union countries (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1184

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