Inflation and Uncertainty: Does the EMS P a rticipation Play Any Role?

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.