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Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs

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  • HELGE BERGER
  • PÄR ÖSTERHOLM

Abstract

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.

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File URL: http://hdl.handle.net/10.1111/j.1475-4932.2010.00657.x
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Bibliographic Info

Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 87 (2011)
Issue (Month): 276 (March)
Pages: 45-60

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Handle: RePEc:bla:ecorec:v:87:y:2011:i:276:p:45-60

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Keywords: E47 ; E52 ; E58 ;

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Cited by:
  1. Emil Stavrev & Helge Berger, 2012. "The information content of money in forecasting euro area inflation," Applied Economics, Taylor & Francis Journals, vol. 44(31), pages 4055-4072, November.
  2. André Fourçans & Jonathan Benchimol, 2009. "Money in a DSGE framework with an application to the Euro Zone," Post-Print hal-00553495, HAL.
  3. Helge Berger & Thomas Harjes, 2009. "Does Global Liquidity Matter for Monetary Policy in the Euro Area?," International Finance, Wiley Blackwell, vol. 12(1), pages 33-55, 05.
  4. Fourçans, André & Vranceanu, Radu, 2008. "Money in the Inflation Equation: the Euro Area Evidence," ESSEC Working Papers DR 08012, ESSEC Research Center, ESSEC Business School.

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