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Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence From Out-Of-Sample Forecasts Using Bayesian Vars

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  • Pär Österholm
  • Helge Berger

Abstract

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/53.

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Length: 29
Date of creation: 01 Mar 2008
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Handle: RePEc:imf:imfwpa:08/53

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Keywords: Monetary aggregates; European Central Bank; inflation; money growth; monetary policy; monetary economics; central bank; inflation forecasts; monetary aggregate; low inflation; money demand; aggregate demand; forecasting inflation; monetary indicators; inflation target; quantity theory; monetary fund; money supply; monetary phenomenon; monetary analysis; monetary policy strategy; monetary models; high inflation; monetary model; quantity theory of money; average inflation; demand for money; inflation dynamics; nominal interest rate; real interest rate; theory of money; monetary policy rules;

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Cited by:
  1. André Fourçans & Jonathan Benchimol, 2009. "Money in a DSGE framework with an application to the Euro Zone," Post-Print hal-00553495, HAL.
  2. Helge Berger & Thomas Harjes, 2009. "Does Global Liquidity Matter for Monetary Policy in the Euro Area?," IMF Working Papers 09/17, International Monetary Fund.
  3. Emil Stavrev & Helge Berger, 2012. "The information content of money in forecasting euro area inflation," Applied Economics, Taylor & Francis Journals, vol. 44(31), pages 4055-4072, November.
  4. Fourçans, André & Vranceanu, Radu, 2008. "Money in the Inflation Equation: the Euro Area Evidence," ESSEC Working Papers DR 08012, ESSEC Research Center, ESSEC Business School.

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