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Money and inflation in the euro area: A case for monetary indicators?

  • Gerlach, Stefan
  • Svensson, Lars E. O.

This paper studies the relationship between inflation, output, money and interest rates in the euro area, using data spanning 1980 2000. The P* model is shown to have considerable empirical support. Thus, the price gap' or, equivalently, the real money gap' (the gap between current real balances and long-run equilibrium real balances), has substantial predictive power for future inflation. The real money gap contains more information about future inflation than the output gap and the Eurosystem's money-growth indicator (the gap between current M3 growth and a reference value). The results suggest that the Eurosystem's money-growth indicator is an inferior indicator of future inflation.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 50 (2003)
Issue (Month): 8 (November)
Pages: 1649-1672

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Handle: RePEc:eee:moneco:v:50:y:2003:i:8:p:1649-1672
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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