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The Information Content of Money in Forecasting Euro Area Inflation

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  • Emil Stavrev
  • Helge Berger

Abstract

This paper contributes to the debate on the role of money in monetary policy by analyzing 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 DSGE models and 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, non-monetary models dominate monetary models in an all-out horserace.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/166.

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Length: 29
Date of creation: 01 Jul 2008
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Handle: RePEc:imf:imfwpa:08/166

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Keywords: Forecasting models; Economic models; inflation; monetary policy; aggregate demand; real money; money growth; money demand; money balances; money stock; forecasting inflation; monetary economics; monetary aggregates; central bank; inflation forecasts; price level; nominal interest rate; monetary indicators; monetary models; real interest rate; inflation equation; monetary policy reaction function; inflation target; low inflation; quantity theory of money; monetary factors; monetary policy rule; inflation dynamics; monetary policy strategy; monetary phenomenon; money supply; monetary targeting; monetary fund; monetary aggregate; monetary analysis; theory of money; national bank; money stocks; macroeconomic stability; high inflation; real interest rates; quantity theory; annual inflation; predictions of inflation; aggregate demand curve; nominal interest rates;

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References

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Citations

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

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