Does stock market uncertainty impair the use of monetary indicators in the euro area?
AbstractThe relationship between monetary indicators and inflation is ussually assumed to be linear, implying that looser monetary conditions always signal an increase in in.ation. Recently, money growth in the euro area surged while inflation remained comparatively subdued. This seems at variance with linearity. At the same time, stock market uncertainty peaked, suggesting that part of the money growth resulted from portfolio adjustment and was hence non-inflationary. We employ a threshold regression model to verify the claim that the impact of monetary indicators on future inflation varies conditional on stock price volatility. We show that there is limited evidence to support this claim. On the other hand, our results indicate that stock market data may contain useful information regarding future inflation.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number 2003-15.
Date of creation: Dec 2003
Date of revision:
inflation; money; threshold regression;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-15 (All new papers)
- NEP-EEC-2004-02-15 (European Economics)
- NEP-FMK-2004-02-15 (Financial Markets)
- NEP-MAC-2004-02-15 (Macroeconomics)
- NEP-MON-2004-02-15 (Monetary Economics)
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