Is core money growth a good and stable inflation predictor in the euro area?

Arbeitspapier

In this paper, it is analyzed whether core money growth helps to predict future inflation in a useful and reliable way. Using an out-of-sample forecasting exercise and a stability analysis, it is shown that core money growth carries important information not contained in the inflation history, that its inclusion in a forecasting model can increase the forecasting accuracy, and that it has had a strong and stable long-run link to inflation over the last decades. A particularly promising forecasting model at all horizons is the one proposed by Gerlach (2004) that includes the inflation gap, the difference between core money growth and core inflation, and the output gap. This model has a very good track record, exhibits stable parameters over both the pre-EMU and the EMU era. What makes it appealing from a more theoretical perspective is that it relies on the stable long-run relationship between money growth and inflation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Kiel Working Paper ; No. 1318

Classification and Topics

• Classification: Wirtschaft ; Central Banks and Their Policies ; Money and Interest Rates: Forecasting and Simulation: Models and Applications
• Subject: Forecasting ; core money growth ; stability ; filter ; Geldmenge ; Inflationsrate ; Prognoseverfahren ; Zeitreihenanalyse ; Schätzung ; Inflation ; Europäische Wirtschafts- und Währungsunion ; EU-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Carstensen, Kai
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/17842
• Last update: 10.03.2025, 11:44 AM CET