Inflation and Uncertainty: Does the EMS Participation Play Any Role?

Abstract

This paper examines whether European Monetary System (EMS) member ship has affected the link between inflation and inflation uncertainty. ARCH measures of conditional inflation volatility and Granger-causality tests for nine OECD countries over the period 1980-1994 indicate that in non-EMS coun tries -in these countries a monetary target seems to have been closely followedinflation seems to determine the behaviour of inflation uncert a i n t y. By con trast, in EMS countries ‐ these countries have geared their monetary policies to an exchange rate target ‐ inflation seems to have no impact on inflation uncertainty. This finding is probably due first, to the absence of any institution al restriction that characterises non-EMS membership, on the manner the monetary policy is pursued, and second, to the fact that under a monetary rule, any institutional or regulatory changes in the monetary sector are expected to fall more adversely upon inflation as well as inflation uncertainty. (JEL Classi fication: E31)