IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out‐of‐Sample Forecasts Using Bayesian VARs

  • HELGE BERGER
  • PÄR ÖSTERHOLM

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1111/j.1475-4932.2010.00657.x
Download Restriction: no

Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 87 (2011)
Issue (Month): 276 (March)
Pages: 45-60

as
in new window

Handle: RePEc:bla:ecorec:v:87:y:2011:i:276:p:45-60
Contact details of provider: Postal: Central Council Administration, L.P.O. Box 2161, Hawthorn VIC 3122
Phone: 61 3 9497 4140
Fax: 61 3 9497 4140
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0013-0249
Email:


More information through EDIRC

Order Information: Web: http://www.blackwellpublishing.com/subs.asp?ref=0013-0249

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jordi Galí & Mark Gertler, 2007. "Macroeconomic modeling for monetary policy evaluation," Economics Working Papers 1039, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2007.
  2. Bachmeier, Lance & Leelahanon, Sittisak & Li, Qi, 2007. "Money Growth And Inflation In The United States," Macroeconomic Dynamics, Cambridge University Press, vol. 11(01), pages 113-127, February.
  3. Javier Andrés & J. David López-Salido & Javier Vallés, 2006. "Money in an Estimated Business Cycle Model of the Euro Area," Economic Journal, Royal Economic Society, vol. 116(511), pages 457-477, 04.
  4. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  5. Nelson, Edward, 2001. "Direct Effects of Base Money on Aggregate Demand: Theory and Evidence," CEPR Discussion Papers 2666, C.E.P.R. Discussion Papers.
  6. Adolfson, Malin & Andersson, Michael K. & Lindé, Jesper & Villani, Mattias & Vredin, Anders, 2005. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," Working Paper Series 188, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
  7. Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration," NBER Working Papers 13207, National Bureau of Economic Research, Inc.
  8. Pär Österholm, 2008. "Can forecasting performance be improved by considering the steady state? An application to Swedish inflation and interest rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(1), pages 41-51.
  9. 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.
  10. Marvin Goodfriend & Robert King, 2005. "The Incredible Volcker Disinflation," NBER Working Papers 11562, National Bureau of Economic Research, Inc.
  11. Hofmann, Boris, 2006. "Do monetary indicators (still) predict euro area inflation?," Discussion Paper Series 1: Economic Studies 2006,18, Deutsche Bundesbank, Research Centre.
  12. Todd E. Clark & Michael W. McCracken, 1999. "Tests of equal forecast accuracy and encompassing for nested models," Research Working Paper 99-11, Federal Reserve Bank of Kansas City.
  13. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
  14. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  15. Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, 06.
  16. Nelson, Edward, 2003. "The Future of Monetary Aggregates in Monetary Policy Analysis," CEPR Discussion Papers 3897, C.E.P.R. Discussion Papers.
  17. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  18. Peter N. Ireland, 2000. "Money's Role in the Monetary Business Cycle," Boston College Working Papers in Economics 458, Boston College Department of Economics.
  19. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-88, September.
  20. Bennett T. McCallum, 2001. "Monetary Policy Analysis in Models Without Money," NBER Working Papers 8174, National Bureau of Economic Research, Inc.
  21. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.
  22. Sergio Rossi, 2001. "Money and Inflation," Books, Edward Elgar, number 2571, March.
  23. Jones, Barry E. & Stracca, Livio, 2006. "Are money and consumption additively separable in the euro area? A non-parametric approach," Working Paper Series 0704, European Central Bank.
  24. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Understanding the Link between Money Growth and Inflation in the Euro Area," CEPR Discussion Papers 5683, C.E.P.R. Discussion Papers.
  25. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  26. Stefan Gerlach & Katrin Assenmacher-Wesche, 2006. "Interpreting Euro area inflation at high and low frequencies," BIS Working Papers 195, Bank for International Settlements.
  27. Benati, Luca, 2009. "Long run evidence on money growth and inflation," Working Paper Series 1027, European Central Bank.
  28. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
  29. Meredith Beechey & Pär Österholm, 2012. "The Rise and Fall of U.S. Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 55-86, September.
  30. Lance J. Bachmeier & Norman R. Swanson, 2003. "Predicting Inflation: Does The Quantity Theory Help?," Departmental Working Papers 200317, Rutgers University, Department of Economics.
  31. Armstrong, J. Scott, 2007. "Significance tests harm progress in forecasting," International Journal of Forecasting, Elsevier, vol. 23(2), pages 321-327.
  32. Lutkepohl, Helmut, 1989. "A note on the asymptotic distribution of impulse response functions of estimated var models with orthogonal residuals," Journal of Econometrics, Elsevier, vol. 42(3), pages 371-376, November.
  33. Todd E. Clark, 1996. "Finite-sample properties of tests for forecast equivalence," Research Working Paper 96-03, Federal Reserve Bank of Kansas City.
  34. Galina Hale & Òscar Jordà, 2007. "Do monetary aggregates help forecast inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr13.
  35. Villani, Mattias, 2005. "Inference in Vector Autoregressive Models with an Informative Prior on the Steady State," Working Paper Series 181, Sveriges Riksbank (Central Bank of Sweden).
  36. Werner, Thomas & Lombardo, Giovanni & Kremer, Jana, 2003. "Money in a New-Keynesian model estimated with German data," Discussion Paper Series 1: Economic Studies 2003,15, Deutsche Bundesbank, Research Centre.
  37. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  38. Albert Jaeger, 2003. "The ECB'S Money Pillar; An Assessment," IMF Working Papers 03/82, International Monetary Fund.
  39. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Money and the Natural Rate of Interest: Structural Estimates for the UK, the US and the euro area," CEPR Discussion Papers 4337, C.E.P.R. Discussion Papers.
  40. Scharnagl, Michael & Schumacher, Christian, 2007. "Reconsidering the role of monetary indicators for euro area inflation from a Bayesian perspective using group inclusion probabilities," Discussion Paper Series 1: Economic Studies 2007,09, Deutsche Bundesbank, Research Centre.
  41. Gerlach, Stefan, 2003. "The ECB's Two Pillars," CEPR Discussion Papers 3689, C.E.P.R. Discussion Papers.
  42. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  43. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-67, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bla:ecorec:v:87:y:2011:i:276:p:45-60. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.