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Does Money Matter For Inflation In The Euro Area?

  • SYLVIA KAUFMANN
  • PETER KUGLER

"We analyze the relationship between M3 growth and inflation within an error correction framework including also the output gap, the 3-mo EURIBOR, and the 10-yr government bond yield. We find robust cointegration between money growth and inflation. Shocks in M3 growth account for up to 30% of the inflation forecast error variance, while the effects of output gap and interest rate shocks are mainly transitory. Significantly different dynamics are found during periods at the end of the seventies and beginning of the eighties when interest rate and inflation rate levels were high and real money growth decreasing. "("JEL "C32, E31, E41) Copyright (c) 2008 Western Economic Association International.

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Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 26 (2008)
Issue (Month): 4 (October)
Pages: 590-606

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Handle: RePEc:bla:coecpo:v:26:y:2008:i:4:p:590-606
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  1. Sylvia Kaufmann & Maria Teresa Valderrama, 2004. "Modeling Credit Aggregates," Working Papers 90, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Oliver Holtemöller, 2004. "A monetary vector error correction model of the Euro area and implications for monetary policy," Empirical Economics, Springer, vol. 29(3), pages 553-574, 09.
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  4. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  5. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  6. Engsted, Tom & Gonzalo, Jesus & Haldrup, Niels, 1997. "Testing for multicointegration," Economics Letters, Elsevier, vol. 56(3), pages 259-266, November.
  7. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  8. Haldrup, Niels, 1994. "The asymptotics of single-equation cointegration regressions with I(1) and I(2) variables," Journal of Econometrics, Elsevier, vol. 63(1), pages 153-181, July.
  9. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
  10. Neumann, Manfred J. M. & Greiber, Claus, 2004. "Inflation and core money growth in the euro area," Discussion Paper Series 1: Economic Studies 2004,36, Deutsche Bundesbank, Research Centre.
  11. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.
  12. Kai Carstensen, 2003. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy.
  13. Jürgen von Hagen, 2004. "Hat die Geldmenge ausgedient?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(4), pages 423-453, November.
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