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

References

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  1. 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.
  2. Svensson, Lars E O, 1999. "Does the P* Model Provide Any Rationale for Monetary Targeting?," CEPR Discussion Papers 2198, C.E.P.R. Discussion Papers.
  3. 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.
  4. 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.
  5. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  6. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 727-748.
  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. repec:fth:baesse:9817 is not listed on IDEAS
  9. Joachim Scheide & Mathias Trabandt, 2000. "Predicting Inflation in Euroland � The Pstar Approach," Kiel Working Papers 1019, Kiel Institute for the World Economy.
  10. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  11. Bennett T. McCallum, 2002. "Recent developments in monetary policy analysis: the roles of theory and evidence," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 67-96.
  12. repec:wop:humbsf:2000-35 is not listed on IDEAS
  13. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, octubre-d.
  14. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  15. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  16. 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.
  17. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers 98, Bank for International Settlements.
  18. 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.
  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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