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Money and inflation in the Euro Area: A case for monetary indicators?

  • Lars E.O. Svensson

    (Princeton University - Department of Economics)

  • Stefan Gerlach

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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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 98.

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Length: 30 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:bis:biswps:98
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  2. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
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