Monetary Policy Effectiveness and Inflation Persistence; Panel Test for Fractional Integration; Change in Inflation Persistence
332 Finanzwirtschaft 337 Internationale Volkswirtschaft
This paper uses the European Monetary Union (EMU) as a natural
experiment to investigate whether more effective monetary policy reduces
the persistence of inflation. Taking into account the fractional
integration of inflation, we confirm that inflation dynamics differed considerably
across Euro area countries before the start of EMU. Since
1999, however, results obtained from panel estimation indicate that
the degree of long run inflation persistence has converged. In line with
theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more
effective monetary policy of the ECB.
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