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The information content of money in forecasting euro area inflation

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  • Emil Stavrev
  • Helge Berger

Abstract

This article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models and Vector Autoregressions (VARs) incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, nonmonetary models dominate monetary models in an all-out horserace.

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File URL: http://hdl.handle.net/10.1080/00036846.2011.587776
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 44 (2012)
Issue (Month): 31 (November)
Pages: 4055-4072

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Handle: RePEc:taf:applec:44:y:2012:i:31:p:4055-4072

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Cited by:
  1. José De Gregorio, 2008. "Price Stability and Financial Stability: Some Thoughts on the Current Global Financial Crisis," Economic Policy Papers Central Bank of Chile 28, Central Bank of Chile.
  2. International Monetary Fund, 2010. "Commodity Prices and Inflation in the Middle East, North Africa, and Central Asia," IMF Working Papers 10/135, International Monetary Fund.
  3. Andrea Nobili, 2009. "Composite indicators for monetary analysis," Temi di discussione (Economic working papers) 713, Bank of Italy, Economic Research and International Relations Area.
  4. Arto Kovanen, 2011. "Does Money Matter for Inflation in Ghana?," IMF Working Papers 11/274, International Monetary Fund.
  5. Gianni Amisano & Roberta Colavecchio, 2013. "Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR," Macroeconomics and Finance Series 201304, Hamburg University, Department Wirtschaft und Politik.

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