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The relationship between monetary policy rate decision, inflation and unemployment in the euro area

Pattapeesin, Thanawan (2021) The relationship between monetary policy rate decision, inflation and unemployment in the euro area. Masters thesis, Dublin, National College of Ireland.

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Abstract

This study examines the relationship between the interest rate on main refinancing operations which is one of the ECB’s key rates and inflation, and also the key rate and unemployment in the euro area from the quarterly data from the first quarter of 2009 to the first quarter of 2021 by Granger causality test. A pre-condition for a Granger Causality test is that the data is stationary, so we first test whether our sample data is stationary by the Augmented Dickey-Fuller (ADF) test with Schwarz Information Criterion (SIC) which also known as Bayesian Information Criterion (BIC).

As the main refinancing operation rate, the Harmonised Index of Consumer Prices (HICP) inflation and the unemployment rate data of the eurozone is non-stationary, we use the first-order difference method to make the data stationary. Then, we check again whether the data at first difference is stationary by the ADF test with the SIC. The results show that the data become stationary. Therefore, the Granger causality test is adopted to investigate the relationship with these variables.

The findings show that the past 8-lag value of the HICP inflation can be used to predict the monetary policy rate decision represented by the interest rate on main refinancing operations and the past 10-, 11- and 12-lag value of the unemployment rate is useful to forecast the rate on main refinancing operations while the past 10-lag value of the unemployment has the strongest prediction power. Conversely, a change in main refinancing operation rate does not improve the inflation and the unemployment rate.

Item Type: Thesis (Masters)
Uncontrolled Keywords: The interest rate on main refinancing operations; HICP inflation; unemployment; JEL code: E58
Subjects: D History General and Old World > D History (General) > D901 Europe (General)
H Social Sciences > Economics
H Social Sciences > HG Finance > International Finance. International Monetary System
H Social Sciences > HD Industries. Land use. Labor > Issues of Labour and Work > Unemployment
Divisions: School of Business > Master of Science in Finance
Depositing User: Clara Chan
Date Deposited: 25 Feb 2022 15:58
Last Modified: 25 Feb 2022 15:58
URI: http://norma.ncirl.ie/id/eprint/5493

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