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The information content of M3 for future inflation

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Author Info
Carmine Trecroci (University of Brescia, Department of Economics, Via San Faustino 74B, Brescia 25122, Italy.)
Juan Luis Vega-Croissier () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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Abstract

The information content of broad money M3 for future GDP inflation in the euro area is investigated from a number of perspectives. Firstly, tests that money does not Granger-cause prices are conducted within a cointegrated VAR system comprising real M3 holdings, real GDP, inflation and short- and long-term interest rates. Secondly, this empirical framework is extended to investigate the claim that – in the context of an extended P-star model – the real money gap has substantial predictive power for future inflation. And thirdly, the P-star type of model developed is compared with an existing rival model of inflation in the euro area where no explicit role is given to monetary developments. Our empirical results confirm that a significant positive association exists between the real money gap and future inflation up to five to six quarters ahead, reaching a maximum at the three-to-four quarter horizon. It is also shown that, although the extended P-star model outperforms the competing model in terms of out-of-sample forecast accuracy (as measured by the root mean square forecast errors) at horizons above two quarters, the hypothesis that no useful information is contained in rival evidence can be rejected at standard confidence levels. JEL Classification: C32; C50; E30; E40.

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Paper provided by European Central Bank in its series Working Paper Series with number 33.

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Length: 33 pages
Date of creation: Oct 2000
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Handle: RePEc:ecb:ecbwps:20000033

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Related research
Keywords: Euro area; inflation; monetary aggregates; M3; leading indicators; P-star.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Gerlach, Stefan, 2003. "The ECB's Two Pillars," CEPR Discussion Papers 3689, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Bordes, C. & Clerc, L., 2004. "Price Stability and The ECB's Monetary Policy Strategy," Documents de Travail 109, Banque de France. [Downloadable!]
    Other versions:
  4. Stefan Gerlach & Lars E.O. Svensson, 2000. "Money and Inflation in the Euro Area: A Case for Monetary Indicators?," NBER Working Papers 8025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Anna Maria Agresti & Benoit Mojon, 2001. "Some stylised facts on the Euro area business cycle," Working Paper Series 095, European Central Bank. [Downloadable!]
  6. Jan Gottschalk & Stéphanie Stolz, 2001. "The Link of the Monetary Indicator to Future Inflation in the Euro Area — A Simulation Experiment," Kiel Working Papers 1057, Kiel Institute for the World Economy. [Downloadable!]
  7. Virginie Traclet, 2004. "Monetary and Fiscal Policies in Canada: Some Interesting Principles for EMU?," Working Papers 04-28, Bank of Canada. [Downloadable!]
  8. O. Holtemöller, . "Money and Prices: An I(2) Analysis for the Euro Area," Sonderforschungsbereich 373 2002-12, Humboldt Universitaet Berlin.
  9. Nicoletta Batini, 2002. "Euro area inflation persistence," Working Paper Series 201, European Central Bank. [Downloadable!]
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  10. Giuseppe Ferrero & Andrea Nobili & Patrizia Passiglia, 2007. "The sectoral distribution of money supply in the Euro area," Temi di discussione (Economic working papers) 627, Bank of Italy, Economic Research Department. [Downloadable!]
  11. Joao Sousa & Andrea Zaghini, 2008. "Monetary policy shocks in the euro area and global liquidity spillovers," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 205-218. [Downloadable!]
    Other versions:
  12. Filippo Altissimo & Eugenio Gaiotti & Alberto Locarno, 2002. "Is money informative? Evidence form a large model used for policy analysis," Temi di discussione (Economic working papers) 445, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  13. Klaus Masuch & Sergio Nicoletti-Altimari & Massimo Rostagno & Huw Pill, 2003. "The role of money in monetary policymaking," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 158-191 Bank for International Settlements. [Downloadable!]
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  15. Paolo PAESANI, 2003. "Will the Monetary Pillar Stay? A Few Lessons from the UK," Economics Working Papers ECO2003/10, European University Institute. [Downloadable!]
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