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Money Demand Stability And Inflation Prediction In The Four Largest Emu Countries

  • Kai Carstensen
  • Jan Hagen
  • Oliver Hossfeld
  • Abelardo Salazar Neaves

In this paper we analyze the money demand functions of the four largest EMU countriesand of the four-country (EMU-4) aggregate. We identify reasonable and stable moneydemand 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 thatthe 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 measuresas predictors of inflation. Hence, aggregate money overhang is an important, but by farnot an exhaustive, indicator for the disaggregate level.

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Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 56 (2009)
Issue (Month): 1 (02)
Pages: 73-93

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