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Do monetary indicators lead euro area inflation?

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  • Hofmann, Boris

Abstract

This paper assesses based on euro area data whether the strong in-sample long-run link between money growth and inflation that has been highlighted by a number of recent empirical studies is exploitable to predict inflation out of sample. The results from standard bivariate forecasting models suggest that no monetary (nor any other) single indicator significantly outperforms a simple benchmark forecast. The further analysis shows that it would be premature however to discard based on such evidence the usefulness of monetary (and all other) indicators. First, it is shown that based on judgemental adjustments to monetary indicators correcting for the effects of identifiable, persistent velocity shifts, it appears possible to significantly improve predictive ability in real time. Second, I find that a factor forecasting model combining monetary and economic indicators, which can be regarded as a generalized quantity theory- or two-pillar Phillips Curve-forecasting model, delivers a fairly good and stable forecasting performance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 7 (November)
Pages: 1165-1181

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:7:p:1165-1181

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Euro area Inflation Leading indicators Money;

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Cited by:
  1. Kurmas Akdogan & Selen Baser & Meltem Gulenay Chadwick & Dilara Ertug & Timur Hulagu & Sevim Kosem & Fethi Ogunc & M. Utku Ozmen & Necati Tekatli, 2012. "Short-Term Inflation Forecasting Models For Turkey and a Forecast Combination Analysis," Working Papers 1209, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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