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(When) does money growth help to predict Euro-area inflation at low frequencies?

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  • Schreiber, Sven

Abstract

Short answer: It helps a lot when other important variables are excluded from the information set. Longer answer: We revisit claims in the literature that money growth is Granger-causal for inflation at low frequencies. Applying frequency-specific tests in a comprehensive system setup for euro-area data we consider various theoretical predictors of inflation. A general-to-specific testing strategy reveals a recursive structure where only the unemployment rate and long-term interest rates are directly Granger-causal for low-frequency inflation movements, and all variables affect money growth. We therefore interpret opposite results from bivariate inflation/money growth systems as spurious due to omittedvariable biases. We also analyze the resulting four-dimensional system in a cointegration framework and find structural changes in the long-run adjustment behavior, which do not affect the main conclusions, however. --

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Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2013/10.

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Date of creation: 2013
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Handle: RePEc:zbw:fubsbe:201310

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Keywords: money growth; granger causality; quantity theory; unemployment;

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