Resource title

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

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Resource description

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.

Resource author

Kai Carstensen

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/17842

Resource license

Adapt according to the presented license agreement and reference the original author.