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The Link of the Monetary Indicator to Future Inflation in the Euro Area � A Simulation Experiment

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  • Jan Gottschalk
  • Stéphanie Stolz

Abstract

We examine the indicator property of the monetary indicator for inflation. Using a P*-model, Svensson shows theoretically in a recent paper that the relationship between these two variables is rather tenuous. The present study employs empirical evidence on the relations in his model to quantify its dynamics for the euro area. Moreover, we extend SvenssonÂ’s analysis by considering different shocks and monetary regimes. It becomes apparent that the system exhibits complicated dynamics and that for most shocks and policy regimes the monetary indicator is not a leading indicator of dangers to price stability in the medium term.

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File URL: http://www.ifw-members.ifw-kiel.de/publications/the-link-of-the-monetary-indicator-to-future-inflation-in-the-euro-area-a-simulation-experiment/kap1057.pdf
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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1057.

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Length: 42 pages
Date of creation: Jul 2001
Date of revision:
Handle: RePEc:kie:kieliw:1057

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Related research

Keywords: Monetary; Targeting; Inflation; Targeting; Euro Area;

References

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  1. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  2. Bennett McCallum, 1999. "Recent developments in monetary policy analysis: the roles of theory and evidence," Journal of Economic Methodology, Taylor & Francis Journals, vol. 6(2), pages 171-198.
  3. 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.
  4. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  5. Lars E. O. Svensson, 2000. "Does the P* Model Provide Any Rationale for Monetary Targeting?," German Economic Review, Verein für Socialpolitik, vol. 1(1), pages 69-81, 02.
  6. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  8. Jan Gottschalk & Felipe Martinez Rico & Willem Van Zandweghe, 2000. "Money as an Indicator in the Euro Zone," Kiel Working Papers 984, Kiel Institute for the World Economy.
  9. Müller, Christian & Hahn, Elke, 2000. "Money demand in Europe: Evidence from the past," SFB 373 Discussion Papers 2000,35, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
  11. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, May.
  12. repec:fth:baesse:9817 is not listed on IDEAS
  13. Joachim Scheide & Mathias Trabandt, 2000. "Predicting Inflation in Euroland � The Pstar Approach," Kiel Working Papers 1019, Kiel Institute for the World Economy.
  14. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  15. P.J.G. Vlaar & H. Schuberth, 1999. "Monetary Transmission and Controllability of Money in Europe: aStructural Vector Error Correction Approach," DNB Staff Reports (discontinued) 36, Netherlands Central Bank.
  16. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  17. repec:wop:humbsf:2000-35 is not listed on IDEAS
  18. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-58, September.
  19. Alberto Cabrero & Juan L. Escrivá & Emilio Muñoz & Juan Peñalosa, 1998. "The Controllability of a Monetary Aggregate in EMU," Banco de Espa�a Working Papers 9817, Banco de Espa�a.
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