DOES MONEY MATTER FOR INFLATION IN THE EURO AREA?

Sylvia Kaufmann · Peter Kügler

29 citations0/0 files storedContemporary Economic Policy

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Monetary Policy and Economic Impact Economic theories and models European Monetary and Fiscal Policies

Abstract

We analyze the relationship between M3 growth and inflation within an error correction framework including also the output gap, the 3‐mo EURIBOR, and the 10‐yr government bond yield. We find robust cointegration between money growth and inflation. Shocks in M3 growth account for up to 30% of the inflation forecast error variance, while the effects of output gap and interest rate shocks are mainly transitory. Significantly different dynamics are found during periods at the end of the seventies and beginning of the eighties when interest rate and inflation rate levels were high and real money growth decreasing. (JEL C32, E31, E41)

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References

1993Introduction to Multiple Time Series Analysis 1986Forecasting With Bayesian Vector Autoregressions—Five Years of Experience 1970A Theoretical Framework for Monetary Analysis 1986Forecasting with Bayesian Vector Autoregressions: Five Years of Experience 20124 Two Illustrations of the Quantity Theory of Money 1992VECTOR AUTOREGRESSIVE MODELS WITH UNIT ROOTS AND REDUCED RANK STRUCTURE:ESTIMATION. LIKELIHOOD RATIO TEST, AND FORECASTING 2003The future of monetary aggregates in monetary policy analysis 2003Money and inflation in the euro area: A case for monetary indicators?

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