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Money demand stability and inflation prediction in the four largest EMU countries

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  • Carstensen, Kai
  • Hagen, Jan
  • Hossfeld, Oliver
  • Neaves, Abelardo S.

Abstract

In this paper, we analyze the money demand functions of the four largest EMU countries and of the four-country (EMU-4) aggregate. We identify reasonable and stable money demand relationships for Germany, France and Spain as well as the EMU-4 aggregate. For the case of Italy, results are less clear. From the estimated money demand functions, we derive both EMU-4 and country-specific measures of money overhang. We find that the EMU-4 overhang measure strongly correlates with the country-specific measures, particularly since the start of EMU, and is useful to predict country-specific inflation. However, it generally does not encompass country-specific money overhang measures as predictors of inflation. Hence, aggregate money overhang is an important, but by far not an exhaustive, indicator for the disaggregate level.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19946.

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Date of creation: 2009
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Publication status: Published in Scottish Journal of Political Economy 1 56(2009): pp. 73-93
Handle: RePEc:lmu:muenar:19946

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Cited by:
  1. Christian Dreger & Jürgen Wolters, 2013. "Money demand and the role of monetary indicators in forecasting euro area inflation," FIW Working Paper series 119, FIW.
  2. Clemens Kool & Erik de Regt & Tom van Veen, 2013. "Money Overhang, Credit Overhang and Financial Imbalances in the Euro Area," CESifo Working Paper Series 4476, CESifo Group Munich.
  3. Ansgar Belke & Robert Czudaj, 2010. "Is Euro Area Money Demand (Still) Stable? – Cointegrated VAR versus Single Equation Techniques," Ruhr Economic Papers 0171, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. Gebhard Kirchgässner & Jürgen Wolters, 2010. "The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank," CESifo Working Paper Series 2928, CESifo Group Munich.
  5. Ralph Setzer & Guntram B. Wolff, 2009. "Money demand in the euro area: new insights from disaggregated data," European Economy - Economic Papers 373, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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