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Credibility of European Monetary System Interest Rate Policies: A Markov Regime‐Switching Approach
Author(s) -
Arestis Philip,
Mouratidis Kostas
Publication year - 2004
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2004.00377.x
Subject(s) - economics , credibility , monetary policy , inflation (cosmology) , markov chain , inflation targeting , output gap , monetary economics , european monetary system , sample (material) , macroeconomics , price of stability , econometrics , international economics , chemistry , physics , chromatography , machine learning , theoretical physics , political science , computer science , law
The Markov regime‐switching modelling framework, with time‐varying transition probabilities, is utilized to study the credibility of monetary policy in five member countries of the European Monetary System during the period 1979–98 (Austria, Belgium, France, Italy and the Netherlands). The output‐gap variability and the inflation variability variables are incorporated in the determination of the monetary policy preferences of the five countries. Empirical evidence is provided to show that although all the countries in our sample followed a credible monetary policy regarding price stability, they had different preferences regarding the trade‐off between the stabilization of output‐gap variability and inflation variability.